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Vantage Point: Dialing Down

Welcome to the latest edition of Vantage Point. While most of our scenarios still center on the economic disruption the virus has caused, in our view the balance between aggregate demand and aggregate supply will determine the outlook for growth, employment and inflation.

Three of our four forecast scenarios make different assumptions about factors impacting the balance of aggregate demand and supply and, by implication, inflationary pressure. Our final scenario is a China focused slowdown that would turn into something more serious than what is currently being priced in.

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Monthly Market Roundup

JANUARY 2022

Shifting Policy

Global stocks reversed losses in November and gained 4.0% bringing 2021’s return to 19.0%.
Positive returns were widespread and led by international developed markets (ex-US) which gained 5.1% (2021: 11.8%) followed by the S&P 500 (4.5%; 2021: 28.7%) and emerging markets (1.8%; 2021: -2.2%).
In the US, the NASDAQ underperformed the S&P 500 both in December (0.7%) and during 2021 (22.2%).
The top-performing sectors in the S&P 500 were more defensive natured with consumer staples leading (10.0%) followed by real estate (9.7%), utilities (9.4%), and health care (8.8%).
Within factors, value (6.8%) and min vol (6.7%) were amongst the leaders in the US while growth (1.2%) and momentum (-0.5%) lagged. In the MSCI EAFE, value (6.0%) led followed by large cap (5.4%) and quality (5.3%).
After reaching the highest since February in late November, US high yield credit spreads retreated 54 bp to near the lowest in Q4. Sovereign interest rates of major economies increased as central banks turned more hawkish and elevated inflation remained persistent.
The US 2-year Treasury gained 17 bp to 0.73% on 12/31 which is the highest since early March 2020 while the 10-year increased 7 bp and by January 6 had also nearly reached the level in the beginning of February 2020.
Covid cases have increased substantially, and while supply bottlenecks could be further impaired, it appears markets are pricing in minimal risk to growth.
The Fed raised its rate forecast for 2022 and pulled forward the start date for tightening and minutes released in early January suggested an even more hawkish stance than from December.
Inflation remains elevated but there are signs supply chain bottlenecks are moderating and could peak over the next quarter.
However, wage pressure from tight labor markets could last longer than expected.
Demand remains strong and should support growth in 2022.
More risky parts of the markets that rallied the most over the last year such as speculative growth and tech could stay under pressure to start 2022.
We expect markets to end 2022 positive but see more volatility ahead particularly around any shift in the outlook for central banks.
China policy easing has stabilized sentiment but the outlook remains highly uncertain and real estate activity continues to slow.

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DECEMBER 2021

Transitory No More

Risk aversion escalated in November driving global equities -2.4% lower bringing the YTD gain to a still strong 14.4%.

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NOVEMBER 2021

Inflation uncertainty persists

After the worst month of the Covid recovery, global stocks rebounded in October by 5.1% which is the highest since November 2020.

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Points of View

What’s priced into markets?

Market Corrections in Historical Context

Since the market has been flirting with a market correction in recent days with a >10% decline from the recent peak. We provide a few quick stats to put the decline in a historical context.

Yields Up, Tech Down to Start the New Year

Only a handful of days into the new trading year, there have been several market moving developments. We discuss some of the highlights, what’s driving the market, and how these fit into our 2022 outlook.

Central Bank Policy Roundup

Last week was a busy (and important) week in central banking. In this note, we summarize our views on the Fed, the BoE, and the ECB policy guidance, markets reaction, and how the current policy stance ties into our outlook for 2022.