By: Russ Colbert
Winter 2022 (Vol. 39, No. 4)
Happy New Year as we move into 2022. It should be a transformative year for us in America as well as around the world. We have had two years of changes in the country and the winds of change are blowing strong this year. The economic long-term fundamentals should take more control of the economy this year as the most important drivers of the economy and financial performance.
The COVID-19 and COVID-19 related rules should begin to have less influence on our lives as the months go by. Even though it seems we all know someone who has tested positive, and cases are at record highs, hospitalizations and deaths are decreasing. This is very good news.
Next, President Biden’s program to increase entitlements and taxes seems to be up in the air with not enough votes to pass at the time of this writing. It is still possible that the plan totaling several trillion dollars or more may get but we think it is looking more unlikely as time goes on. We are predicting either a smaller bill or nothing at all. Many of the moderate democrats up for re-election in November are more reluctant to vote for it the closer we get to the election date.
Speaking of the election in November, if a small number of democrats lose in the house of Representatives and Senate the Republicans would gain control of the House and Senate. Given the history of Mid-term elections and recent state elections races in Virginia and the close race in New Jersey, it is possible Republicans will be picking up many races. A shift in power would mean no more tax hikes and all legislation would have to be bipartisan to pass. But it would also mean more gridlock. Historically, the stock market favors gridlock.
For now, we can look for a contest between fiscal stimulus packages, rising employment, and improving supply chains. The increased demand for big government spending should start to decline this year. The supply chains seem to be slowly improving. Business inventories are starting to grow. This lends us to expect that the chip makers will be increasing production to meet the demand.
The Federal Reserve has a lot on its plate this year recently announcing as many as three rate hikes for 2022.
When hikes occur, they will most likely be in ¼ point increments. The big question is whether or not the Fed policymakers all agree to do it. In the past, many Federal Reserve bankers have been hesitant to act aggressively on rates during an election year so we are thinking they may only raise rates twice due to the importance of this year’s mid-term elections.
Another area to watch closely this year is business profits. They are currently coming in very positive overall. We should keep in mind that some of the earnings strength is coming from temporary government spending. We are seeing more jobs, lower unemployment, and lower participation that could translate into higher wages going forward. This could take a percentage of business and corporate earnings away going forward. We still think growth in profit for companies could reach 10% or better this year. This is below what we saw in 2021, but still very good.
The last piece of the puzzle is China and Russia. Will China invade Taiwan? Will Russia invade Ukraine? It is hard to understand the thinking of these communist leaders. We currently don’t think China will try it this year. They may make an effort to take some of the tiny uninhabited islands off the coast of Taiwan. But we still must wait and see what happens.
Only Putin really knows what will happen on the situation with Ukraine. Both countries would take an economic and stock market hit if they were to invade. It would cause all stock markets to temporarily drop, but neither would change the fundamentals and things would eventually bounce back.
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Senior Portfolio Manager
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.