Healthy Consumers, Demand for Travel, Infrastructure Spending and Easing Inflation Create an Opportunity for Market Entry
As we begin our trek through 2022, the start to the trading year has been more volatile than most investors would like to see, but we’re optimistic that equities can stabilize and begin generating positive returns. As the Federal Reserve pumps the breaks on a fast-paced recovery, volatility is at the doorstep, but we believe there are several trends that can support equities.
The U.S. Consumer Remains Healthy
With more than $2 trillion in accumulated savings, the U.S. consumer is in a very healthy state. Jamie Dimon, CEO of JP Morgan, was quoted on his company’s Q4 earnings release saying, “The economy continues to do quite well despite headwinds related to the Omicron variant, inflation and supply chain bottlenecks.”
In 2021, U.S. GDP growth outpaced developing economies (Europe, Japan, South Korea), growing about 5% after a -4.5% contraction in 2020. This strong economic growth largely converted to profit growth in 2021 for large US-based companies.
More to the point, consumer savings balances are well above pre-COVID levels, which is a positive confirmation of U.S. consumer health.
The U.S. and Global Economy Can Continue to Recover From the Battle with COVID
The demand for social events, leisure/corporate travel, among other things promises to boost recovery of both the U.S. and the global economy.
On Delta Airlines’ Q4 earnings call in early January, CEO Ed Bastian remarked “We remain confident in a strong spring and summer travel season, with significant pent-up demand for consumer and business travel, both domestically and internationally.”
Changes in the CDC quarantine recommendations from 10-14 days in isolation to 5 days in late 2021 kept essential industries like healthcare and transit rolling and prevented labor shortages compared to 2020.
Infrastructure Spending Can Continue to Bolster Economic Growth
General infrastructure spending together with clean energy spending, such as electric vehicle infrastructure, and tech-enabled companies, such as telecommunication technology like 5G and machine learning, will strengthen the economy as well as provide incentive for consumers.
Airports, which are set to receive a $25 billion boost through the Infrastructure and Jobs Act, were a topic of conversation regarding a separate sector that would receive a boost: Broadband and 5G networks.
Broadband networks have been allocated $65 billion for investment through the Infrastructure and Jobs Act. Airlines attempted to set up a roadblock to 5G, saying that the new networks would disrupt air traffic. Regardless, these are powerful technology trends and investments that will drive future innovation.
Inflation is Likely to Ease as 2022 Unfolds
While the status of inflation’s growth is currently an uncertainty, spikes began over the summer of 2021 and picked up even more in the fall. It’s worth noting that these spikes were against softer demand trends brought on by the 2020 COVID lockdowns.
We anticipate some of these areas will see inflation slow down as the law of large numbers suggests meaningful price increases on top of already increased prices is harder to justify.
A Good Investment Point for Market Entry
While the markets have not gotten off to a strong start in 2022, we do believe this is a better investment point than even a few months ago. There is more uncertainty than usual to start the year, but there are some positives.
Despite inflation, the U.S. consumer continues to be generally healthy with job opportunities, the world has a much firmer grasp on COVID than it did just a few months ago, and an upcoming boost to infrastructure will lay a solid foundation on a recovery year.
To that end, we believe companies and sectors that can drive their own growth, rather than be fueled from macroeconomic tailwinds, need to be explored. As valuations normalize and time passes, we can look towards the future while navigating the volatility.
For further information, please see the White House’s fact sheet on the Infrastructure and Jobs Act and Fidelity’s 2022 outlook.
Lorne Bycoff is CEO and Doug Bycoff is CIO of independent private investment and wealth management firm The Bycoff Group