In this month’s blog, Andy Kaufman, CCM’s chief investment officer, shares his thoughts on the financial markets and his outlook for 2022.
2021 was supposed to be the year of recovery. With vaccine roll outs and the possibility of herd immunity, we thought life would be back to normal. While some aspects of life have recovered, a full recovery to pre-pandemic times did not occur. In fact, the world as we know it may never come back to life prior to March 2020, hence “the new normal”. Roger McNamee, who coined the term, originally used it to explain the current landscape of investing after the dotcom bust of the late nineties. He was trying to convey learning lessons from the past while considering a different landscape of the future and how there needs to be a new path forward.
Looking ahead into 2022 and beyond, investors need to analyze the landscape through a similar lens. The pandemic has caused significant structural changes with many of the outcomes yet to play out. The great resignation, stressed supply chains, and new COVID-19 variants are a few of the obvious transformations taking place in “the next new normal.” At the same time, corporate and individual balance sheets are in strong positions helping to lay the foundation for the emergence of an economy that is stronger and more resilient than before.
I anticipate inflation, central bank tightening, new variants, and shortages in labor to be the main drivers in 2022. Large cap equities should outperform small caps, as they have larger balance sheets to manage inflation, wage increases, and higher interest rates. Labor shortages should kick off a multi-year upswing in capital expenditures – something the Great Recession recovery did not experience but which will help extend the current recovery throughout 2022 and beyond. In fixed income, interest rates look to be moving higher, and the curve should flatten as the Federal Reserve (the Fed) finishes quantitative easing (QE) and looks to raise the fed funds rate four times this year. There is a limit to these moves as interest rates in Europe and Japan are still significantly lower causing crossover buying. Additionally, the Fed still has over $8 trillion in bonds sitting on their balance sheet. Even if the Fed starts to unwind their stockpile of assets, it is still a substantial sum that will run off slowly and limit how high interest rates can go. The bottom line: there is opportunity across asset classes and our economy should be even more robust in “the next new normal.”
McNamee may have coined the term back in the early 2000s, but its meaning is still relevant and extremely timely as we kick off this new year. As investors, CCM will look to embrace what has happened and what is now the new status quo instead of resisting it.