This is our biggie each quarter, 21 pages of charts and the context to go with them. As always, we think the windshield view is far more relevant than the rearview. But it’s through the rearview that we get a sense of the path traveled to this point, helping to set the course ahead. The Backdrop for 2022 here:
The Good:
- The U.S. Consumer has Never Been Healthier – We believe the aggregate consumer is flush with cash, and once pent-up demand can safely be unleashed, the U.S. economy can continue to rip higher. The average U.S. Household are worth ~30% more. Consumer balance sheets are well fortified and flush with cash – ready to spend when supply chain and virus risks ease.
- Better than Anticipated Earnings – Given Fiscal stimulus, the pandemic resulted in only a 15% drawdown in earnings – it only took 6 quarters to recoup the demand damages. We remain optimistic, as we continue to see the full-year 2021 earnings estimates from Wall Street analysts continues to grind higher, now standing at $204 – well above the 2019 level. Given the health of the consumer, and if we see peak supply chain stress in the market, we believe that there is upside to these estimates. The market next year will need to see continued growth, off the back of consumer spending, to see positive returns.
The Bad:
- Fed Tapering Misstep – For the most of Q2 and Q3, the yield curve paused its steepening. Now, it is up the Fed Chair Jerome Powell to recognize the level of flattening. This means caution in communication if the Fed is to avoid the mistakes of the Yellen Fed, namely inverting the yield curve and slowing the flow of liquidity to main street by redirecting said liquidity towards Wall Street. We believe the Fed is between a Rock (slower growth) and a Hard Place (Inflation). The Fed’s recent hawkish pivot helps alleviate this worry.
- Longer-than-Expected Supply Chain Issues – It’s no secret that there is a supply chain problem in the United States. Furthermore, it appears to be lasting much longer than originally anticipated. Given the lack of supply, coupled with extreme demand, we’ve seen substantial increases to the price of goods. If these bottlenecks continue to persist, it could dampen future expectations for consumer spending.
The Ugly:
- Faster-than-Expected Inflation Curbing Spending – The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higher-than-expected inflation tends to be a major headwind to equity valuations. Right now, 5YR inflation breakeven figures are well above the Fed’s 2% target. For markets, how the Fed chooses to address inflation is as important as the inflation itself.
We hope you’ll take some time to go through the full report, enjoy!
Disclosures:
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