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The Top 10 Things to Watch in 2022

questions-2022

I thought it would be productive to share some of the things I think are worth watching in 2022 in the form of questions.

But first, have you heard our latest podcast episode? In our most recent episode, I hosted Erin Hay and Rohit Punyani in a discussion that reviews most of 2021 from a high-level asset management perspective. We joke that the podcast was recorded without adult supervision since Jessica was out for some well-deserved rest and relaxation. It’s a great listen for anyone who likes a good discussion of the markets with a few tips to keep you sane heading into 2022.

COVID will dominate how the following will shake out, but I remain optimistic that the pandemic will subside as science continues to make progress and humans adapt. My thoughts have to be framed in a vacuum and clearly cannot incorporate any potential 2022 surprises.

While it’s important to remember that the stock market is not the economy and vice versa, I think these are things worth tracking over the year as a “Health of the Economy Yardstick.” Just like your car’s dashboard can provide you some basic information on the health of your engine, speed of travel, and fuel level, it can’t be used to evaluate how well your trip is going overall. It can’t tell you if there is traffic ahead or if you will reach your destination intact and on time.

You just have to assume that if there are no dashboard warnings, your trip will likely go as planned.

Keep in mind as you read these thoughts that each individual one should conclude with “Let’s watch and see how things shake out.” I’ll add it to the first but not bother repeating it in each thought…

 

1. How much will the economy grow in 2022?

Most reports show economic growth predicted to come in around 5.5% in 2021, rebounding higher from the 2020 COVID slowdown. The Federal Open Market Committee (FOMC) is expecting growth of 3.6% to 4.5% Q4-over-Q4 in 2022.

Let’s watch and see how things shake out.

 

2. Will the core inflation rate increase or decrease by December 2022?

Everyone knows Consumer Price Index (CPI), but I don’t think it’s the best indicator. Neither does the Fed. Without going into a lengthy explanation, the Personal Consumption Expenditures, or PCE, is a little better than CPI. Core PCE increased +4.7% year-over-year (Y/Y) through November. This was the highest Y/Y increase in Core PCE since 1989. The Fed is forecasting the Y/Y change in Core PCE will be between 2.5% and 3.0% at the end of 2022. I shared my somewhat hotly contested thoughts on inflation in my December blog post.

 

3. Will the Fed raise interest rates in 2022?

The Fed cut rates to zero at the onset of COVID and initiated an asset purchase program in March 2020 (aka “Quantitative Easing”). The Fed recently announced they were ending this sooner than initially forecasted and have set an end date of March 2022. Based on that, most forecasts currently expect three interest rate hikes in 2022.

 

4. Will the jobs lost in 2020 return in 2022?

By the end of November 2021, the economy added a little over 6m jobs in 2021 – which, by the way, was the best year for job growth ever. The problem is that there are still about 4m fewer jobs than in February 2020 (which I basically consider the last pre-COVID month).

 

5. What will the unemployment rate be in December 2022?

The unemployment rate measures how many people are out of work as a percentage of the total number of Americans who are in the workforce (not the total population – see more below). By the end of November, the unemployment rate was at 4.2%. This was 2.2 percentage points lower than the year before. Currently, the FOMC is forecasting the unemployment rate will be in the 3.4% to 3.7% range in Q4 2022.

 

6. What will the labor participation rate be in December 2022?

The labor participation rate measures how many Americans are in the work force as a percentage of total population. In November 2021, the overall participation rate was at 61.8%, up year-over-year from 61.5% in November 2020. But remember, the overall participation rate was 63.4% in February 2020. The overall participation rate is predicted to decline down to 60.4% by 2030 due to demographics. (BTW – it peaked in 2000 at 67.3%)

MASTERCLASS – this is important because a shrinking workforce creates a headwind for improving the unemployment rate (whereas a growing workforce helps the unemployment rate – like between November 2020 and November 2021). Examples:

  • February 2020: Say five people have no jobs out of a total workforce pool of 63.4 people (the % rate from above)
    • 5/63.4 = 7.89% unemployment rate
  • November 2022: Say the same five people have no jobs, but the total workforce pool shrunk to 61.8 people (the % rate from above)
    • 5/61.8 = 8.09% unemployment rate
  • If there are still five people out of work in 2030 when the total workforce pool is expected to be smaller at 60.4%
    • 5/60.4 = 8.28%
  • 5 people have no jobs out of a workforce pool of 75:
    • 5/75 = ~6.7%

 

7. How much will housing starts and new home sales impact 2022?

Housing is a big deal for overall growth – just ask anyone who buys a new home how fast they blow through cash buying all kinds of stuff. Through November, housing starts were up 16.3% year-to-date compared to the same period in 2020. New home sales were down 6.5% year-to-date through November (there was a surge in new home sales in the latter part of 2020, so it would have been hard for 2021 to be up over 2020).

 

8. Will mortgage lending be accommodative to buyers (and people taking out home equity loans) in 2022?

Again, housing is a big deal for growth. Low interest rates help.

 

9. What will happen with house prices in 2022?

It appears house prices will be up around 18-20% in 2022.

 

10. Will inventory increase or decrease further in 2022?

Overall housing inventory (all houses) decreased sharply during the pandemic to record lows in early 2021 despite the increase in new housing starts.

 

Watch for data on the above over the year but don’t fixate on it since selling the market based on headlines has never been a successful path to long-term outperformance.

We will see what unfolds and as always…

Keep looking forward,

DBA Signature

 

 

David B. photo

David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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