The following represents the bulk of the information related to the clients of Fagan Associates as it pertains to the upcoming year. Please note that it was written on or before January 14, 2022. Enjoy.
Looking back at this time next year, the following are some topics/events/issues that we believe will have had an impact on 2022.
The death of the days of easy money are overstated and although the Fed hikes rates several times during 2022, the yield curve flattens as the supply chain normalizes, thereby easing inflation. In addition, during the second half of 2022, the disinflationary impact of technology on production, etcetera reasserts itself.
Companies that are Growing at a reasonable price (GARP) such as Apple, Microsoft, Meta Platforms and Google remain under pressure during the first half of 2022. However, this selling pressure will decrease as the year unfolds only to exit 2022 with their beginning valuations intact amidst a robust environment surrounding capital expenditures, specifically in in the technology sector. An Apple car may also be in the offing.
Value companies, those that produce “things” that hurt if you drop them on your foot(Caterpillar, Deere) become laggards during the second half.
Oil prices remain elevated as the move to renewables along with the COVID induced recession during 2020 upset the balance between the supply of traditional fossil fuels available as compared to demand. In addition, exploration and production companies will remain more likely to improve their balance sheets rather than begin to again drill aggressively.
The Fed tightens during the first half of 2022 and well into the third quarter. In our opinion, short-term interest rates will move in both absolute and percentage terms faster than long-term rates which, by definition, will result in a flattening of the yield curve. Policy officials will then take await-and-see attitude to gage the economic impact of the hikes. This will be welcome for savers as yields on Money Market Accounts, Certificates of Deposit, Savings Accounts and Bonds will rise. However, borrowers will not be as fortunate as loans for homes, cars and other large ticket items will also increase.
Rate hikes take hold, impeding economic growth. However, as the stress along the supply chain (manufacturing, shipping, and labor) eases, year-over-year inflation will begin to come down. That said, wage inflation, which we consider a positive result of the pandemic, remains secular. This will put much needed purchasing power in the pockets of the middle class.
Historically, the current unemployment rate of 3.9% represents full employment. However, the capacity utilization rate is at 61.9%,a number which represents the percentage of Americans capable of working that are actually working. This remains approximately two percentage points below historical rates which equates to more than 3,000,000 Americans. We certainly recognize the logistically challenge COVID poses to families ,especially those led by single parents (see women). However, it is the responsibility of corporations and policy makers (monetary and fiscal) to provide a suitable working environment that will enable those that want to work to be able to work and still care for their dependents. As2022 unfolds, we believe that this will become the focus of President Biden along with corporate America.
The media on both sides continue to ratchet up the rhetoric as the mid-term election draws closer. Given the current pace of inflation, we believe President Biden will have trouble holding on to the Senate. (To those much valued clients on the left, this is not a political statement. To those much valued clients on the right, this is not a political statement.)
Nobody can predict where markets are going on a short-term basis. Markets are volatile and risky over the short-term, but on a historical basis, neither over a full economic cycle. However, we have identified above we believe are some headwinds as well as tailwinds to this secular bull market. We believe that the former will prevail during the first half of 2022 and the latter during the second.
Life is a series of moving targets. No matter what business you are in, things are always evolving and changing – sometimes violently and frighteningly. Life is like that. Doctors take our symptoms on an iPad. Toll takers are extinct thanks to powerful sensors. Love it or hate it, social media make it seem like we are living the lives of our neighbors as much as are own.
The investment world is no different. Over the past two years people the world over have fought the battle of their lifetimes, a battle that we appear to be winning, but have not yet conquered, the COVID Pandemic. It has hit home on a number of fronts, not the least of which includes the impact on our physical and mental health as well as our economic security. In addition, investors are dealing with the potential for inflation, higher interest rates, and a sensationalized political environment. Maintaining one’s sanity feels like a full-time job!
With this in mind it pays to remember what many of our parents most likely advised us well into our adulthood. That is to “take a deep breath." Taking a deep breath provides time to think, widens your perspective and frequently results in a much clearer, more fruitful decision. To the above advice, we would add that one should make changes incrementally rather than on a wholesale basis. This would apply to the purchases and sales of individual securities as well as to changes to asset class modeling. At Fagan Associates, we are working on this ratio constantly.
As noted above, we believe the first half of 2022 will be choppy, at best. However, we believe that is not significantly different from many other years. It is part of the price one pays for long-term oversized gains, a fact that investors often overlook.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are nota recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call518-279-1044.
