Wall Street Breakfast: What To Watch In 2022

Will inflation go away? - Seeking Alpha wishes all the readers of Wall Street Breakfast a Happy New Year! Make way for 2022!Risk: Inflation is by far the No. 1 economic concern going into 2022. Many are worried about a period of escalating prices, and don't trust what they're hearing from mainstream economists and central bank officials. At the start of 2021, the U.S. was forecast to end the year with 2% inflation, but it is close to 7% instead. Fed Chair Jay Powell has subsequently backtracked on his "transitory" thesis, with the term endangering a delayed reaction to the current price environment."I think the biggest risk is that expectations about inflation will continue to rise and the more they rise, the more difficult those expectations are to manage," said Gad Levanon, head of the Conference Board's Labor Markets Institute. "It was a hard-earned accomplishment for the Fed to able to anchor inflation expectations, and they are at risk of losing it."Opportunity: Inflation has been a symptom of easy money policies, but more importantly, due to supply bottlenecks and increased consumer spending. If those factors were to ease, much of those fears could dissipate. The Fed could also pull off a delicate balancing act, where both growth and inflation decelerate, but not so much that the economic expansion is put in jeopardy."I do think that we'll see a gradual slowing in inflation throughout 2022," predicted Gus Faucher, chief economist at PNC Financial Services Group. "After a big run-up in energy prices, they're going to stabilize or come down next year. I do think that a lot of the higher price pressures from the reopening of the economy are going to fade, things like airfares, hotel rooms and new and used cars."

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Top News Will inflation go away? Shutterstock Seeking Alpha wishes all the readers of Wall Street Breakfast a Happy New Year! Make way for 2022! Risk: Inflation is by far the No. 1 economic concern going into 2022. Many are worried about a period of escalating prices, and don't trust what they're hearing from mainstream economists and central bank officials. At the start of 2021, the U.S. was forecast to end the year with 2% inflation, but it is close to 7% instead. Fed Chair Jay Powell has subsequently backtracked on his "transitory" thesis, with the term endangering a delayed reaction to the current price environment. "I think the biggest risk is that expectations about inflation will continue to rise and the more they rise, the more difficult those expectations are to manage," said Gad Levanon, head of the Conference Board's Labor Markets Institute. "It was a hard-earned accomplishment for the Fed to able to anchor inflation expectations, and they are at risk of losing it." Opportunity: Inflation has been a symptom of easy money policies, but more importantly, due to supply bottlenecks and increased consumer spending. If those factors were to ease, much of those fears could dissipate. The Fed could also pull off a delicate balancing act, where both growth and inflation decelerate, but not so much that the economic expansion is put in jeopardy. "I do think that we'll see a gradual slowing in inflation throughout 2022," predicted Gus Faucher, chief economist at PNC Financial Services Group. "After a big run-up in energy prices, they're going to stabilize or come down next year. I do think that a lot of the higher price pressures from the reopening of the economy are going to fade, things like airfares, hotel rooms and new and used cars."       What about central bank policy? Risk: There are some negative consequences that could arise if the central bank fails to react appropriately to the current rise in inflation. Asset prices have inflated due to the message from the Fed that any tightening of policy will be limited and gradual. However, if the bank is forced into more extreme monetary policy action, richly supported valuations could melt away. "We are moving from a period in which central banks have tried to be predictable and suppress volatility to one in which they will increasingly be the source of surprises," analysts at Bank of America wrote in a research note. Opportunity: Volatility may still be the name of the game, but if history is any guide, the Fed's "taper tantrum" of 2013 was followed by strong gains for equities, as traders bet the economy was healthy enough to stand on its own. Following Ben Bernanke's comments in May 2013, stocks fell 5.8% in the next month, but for the rest of that year, the market was up 17.5%. Raising rates in 2022 could also be a "net positive" event by signaling that the central bank feels comfortable about the U.S. recovery. "I go into next year feeling like the baseline outlook is a very good one. Therefore, actually raising interest rates would be a sign of a positive development in terms of where we are in the economic cycle," said New York Fed President John Williams. "I'm pretty optimistic that we're seeing really strong improvements in the labor market. You're seeing the unemployment rate come down quickly."       Sponsored By VantagePoint Learn How to Use A.I. For Free Your stock forecast is waiting! If you're ready to take a major step towards faster, smarter trading, then don't wait another minute to join a small community of traders who are conquering volatility daily. It only takes 3 easy steps to see our forecast of today's market: Register Click here to register for free. Attend Our professional A.I. expert will be joining you for 1 hour, LIVE, in an online training room. Ask Use the chat box to type in any questions to our presenter. He will also be calling out ticker symbols so be sure to bring a few of your favorites! Your shortcut to faster, smarter trading is just up ahead. Click here to save your spot! Will stocks keep going up? Risk: So far, the 2020s haven't resulted in the high inflation of the 1970s, or the high unemployment of the 1930s, which were both periods in which it took over a decade for stocks to move consistently upward. But some forecasts see an economic deceleration and higher rates for 2022 that could result in a downward shift, especially easy-money policies that helped fuel S&P returns of 31%, 18% and 27% over the last three years, Morgan Stanley's base-case scenario is for the benchmark index to drop 5% in 2022, while BofA sees the S&P ending the year down 3%. "They're not thinking of double-digit returns and they are hoping they don't get retribution for higher stock market prices," said Lew Altfest, CEO of Altfest Personal Wealth Management, pointing to the meteoric P/E ratios. "Value will have a run... stocks are going to go back to what are reasonable rates. The question is the timing." Opportunity: If these six catalysts break the right way the market could move significantly higher next year, writes Kinsale Trading President Tom Essaye. Among them: 1) Inflation peaks, 2) Central banks don't tighten too much, 3) Build Back Better, 4) Earnings remain very strong, 5) COVID ends, and 6) GOP wins either House or Senate. He also feels that if all the scenarios come to fruition, the S&P could close as high as 5,775 (it is currently at 4,778). "I've voiced some caution for 2022 recently, specifically that we can expect more normal volatility as the Fed removes accommodation," Essaye continued. "But that's not a guaranteed outcome, and there is a path for stocks to continue higher and to again post above-average returns for the fourth year in a row."       What will economic growth look like? Risk: Due to widespread inflation, real GDP growth could turn negative on a quarterly basis in 2022. The Fed's decision to taper its bond buying program and push interest rates higher, could even stall economic growth, or a failure to halt price pressures could lead to the worst of all outcomes: stagflation. There are also other macroeconomic factors at play, like renewed lockdowns seen in Europe, or quarantines and the zero-COVID policy in China, which has driven some 30% of global growth over the past decade. "If COVID-19 were to have a prolonged impact - into the medium term - it could reduce global GDP by a cumulative $5.3T over the next five years relative to our current projection," according to IMF Chief Economist Gita Gopinath. That's on top of the $12.5T in output that was already lost. Opportunity: The Conference Board, a non-profit research group of more than 1,000 public and private corporations, still forecasts that the U.S. economy will grow by 3.5% in 2022. Take for example the solid growth seen last quarter, despite a rise in coronavirus cases across the U.S., as well as a solid season of corporate earnings. There is also the trend for each successive wave of COVID-19 to have a smaller impact on the economy, while consumers keep up robust spending amid an improving labor market.

"Supported by the expectation of continued healthy financial market conditions, increased production to restock lean inventories, further gains in the consumption of services as consumer and business travel picks up, and a resilient housing market, continued above-trend growth is likely in 2022," read a forecast from Kevin Kliesen, economist at the Federal Reserve Bank of St. Louis. "At this point, the most probable outcome is 3% to 4% real GDP growth."

     

Will labor shortages and supply chain problems continue?

Risk: Labor has been the major concern for many industries, given the shrinking workforce from early retirees, mothers that need to secure childcare and those looking for better-paying jobs. Employers not only need to be competitive within that shrinking pool, but also need to retain their talent. Supply chain disruptions have meanwhile played a key role in stalling the global economic recovery due to logistical logjams, a shortage of shipping containers and a steep rebound in demand that left producers in short supply.

"As we go into 2022, I think it's this theme of just volatility, and it's not one particular type of volatility. It's enormous volatility in our supply chain. It's everything from input availability, capacity, transportation, labor, it's COVID adaptations by ways of working adaptation. It's this accordion economy of sort of stop-and-go and the adaptations required," declared Shane Grant, CEO of Danone North America. "The theme going forward is just volatility in everything."

Opportunity: Job growth continues to be very strong and those who do change jobs are often able to secure higher pay. This has led 2021 to see the largest increase in wages over the last two decades. Companies are also starting to rethink their supply chains, including where to source and how to distribute around the world, and that could help things clear up in the coming year.

"The war on talent in 2022 is going to only intensify," Grant added. "It's about game-changing people policies, like gender-neutral parental leave, for not only corporate workers, but frontline workers. It's about institutionalized flexibility. It's about true commitment to diversity actions. And I think those things are going to become true differentiators in this war for talent in 2022."

     

How does the pandemic factor into all of this?

Risk: If the pandemic is allowed to rage on, the world could also see the emergence of vaccine-resistant, or more fatal, COVID variant. Even at the current level, high contagion means hospitalizations and fatalities could remain high. In fact, U.S. deaths from COVID-19 tallied 435K over the course of the year 2021, compared to 385K in 2020. Resulting uncertainty and risk aversion are not good in any scenario and could dampen spirits in the coming year.

"I think we all had we all have employees and family members who say, 'When's it going to end?' And it used to be that there were answers to that, like it was going to end, it's going to end summer of 2021," noted Dr. Marlow Hernandez, CEO of Cano Health. "But COVID is not going to end at any point in 2022. No, sorry. Because it's so transmissible, because it continues to vary."

Opportunity: Besides current vaccines, there are now a whole host of antiviral therapeutics and antibody treatments to combat COVID-19. Researchers are meanwhile looking to develop a universal vaccine to protect against all present and future coronavirus variants, with many scientists already working on such a jab. There is also the possibility that a rapidly spreading variant that is less deadly could signal a COVID-19 transition from pandemic to endemic, and many peoples' attitude has already changed to learning how to live with COVID-19.

"In short, instead of trying to turn back the clock to the lost world of January 2020, consider how we might adapt to our new normal," said best-selling author Dr. Gleb Tsipursky. "COVID will never go away; we need to learn to live with it. That means reacting appropriately and thoughtfully to new variants and being intentional about our trade-offs."

Today's Markets

In Asia, Japan closed. Hong Kong closed. China +0.6%. India +0.8%.
In Europe, at midday, London -0.6%. Paris -0.5%. Frankfurt closed.
Futures at 6:20, Dow -0.3%. S&P -0.2%. Nasdaq -0.3%. Crude -1.1% at $76.15. Gold +0.4% at $1820.50. Bitcoin +1% at $47906.
Ten-year Treasury Yield -1 bps to 1.5%

Today's Economic Calendar

1:00 PM Baker-Hughes Rig Count

Companies reporting earnings today »

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How likely is it that marijuana banking reform gets passed?

What are MKM Partners 'Black Swan' Internet predictions for 2022?

Bernstein 2022 machinery outlook: CAT and PCAR up, AGCO down.

10 Ethereum-based projects that could airdrop tokens in 2022 - Crypto Briefing.

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