Perspectives on the economy and markets for 2022 from Tony Malloy, Executive Vice President and Chief Investment Officer.

Perspectives from Tony Malloy, Executive Vice President and Chief Investment Officer.
 

The U.S. economy enters 2022 in great shape

• The U.S. economy grew 5.7% last year, the fastest pace since 1984
• The labor market continues to recover, with unemployment declining to 3.9%
• The Great Resignation has fueled a war for talent, with job openings and worker turnover hovering near the highest levels on record
• The wealth effect and rising wages are tailwinds for consumption
  •  Household net worth is a record $144T
  • Wages climbed 4.2% last year, the fastest rate in 21 years
  • Growth in Q1 is expected to slow due to Omicron, but this should be short-lived

Highest inflation in 40 years a concern for Wall Street and Main Street alike

• Twin supply/demand shocks fueled inflation above 7% in 2021
• The pandemic contributed to shortages of materials and labor and snarled supply chains
• Record fiscal and monetary stimulus spurred consumer demand for goods
• Inflation pressures real wages, corporate earnings, spending and investment
• Persistently high inflation is unlikely to abate in the near term

Federal Reserve announces hawkish pivot

•  The Fed signaled it would take actions to choke off inflation
• The Fed is expected to raise its Fed Funds policy rate at least 3 or 4 times in 2022
• The Fed plans to reduce its balance sheet, which doubled during the pandemic
•  Considerable uncertainty exists regarding the pace and magnitude of these shifts

Financial markets

• Financial markets came under pressure in January, reflecting investor concerns about inflation, rising interest rates, corporate earnings, and the shift in monetary policy
• Stocks came into the year very expensive and were overdue for a correction
•  Interest rates climbed, and the yield curve flattened in anticipation of Fed actions
•  For markets, the January sell-off marks the end of the pandemic, as stock valuations and the 10-year Treasury yield are back to where they were before the COVID-19 crisis

Outlook

• Strong consumer spending should continue to propel growth in 2022
• Inflation could largely subside on its own, as supply-chain problems get sorted out and consumer demand fades along with the effects of fiscal stimulus
• Risks to the outlook are that Fed is late in acting and that it may have to slam the brakes to keep the economy from overheating

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