Slowing Growth, Strong Dollar, Sector Rotations: Equity Outlook 2022

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  • 03 mins 43 secs
2022 economic backdrop and transitioning markets are explored by Chris Wallis, CEO, Vaughan Nelson Investment Management
Channel: Natixis Investment Managers

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(00:00;00) As we consider kind of the markets outlook as we end 2021, it's helpful to consider where we started in 2021 was really the stage was set with the excess stimulus that occurred in late 2020, early 2021 up about one and a half trillion.

That led to record personal income growth. It led to record really speculative activity within the stock market with ancillary risk assets. It also created material inflationary pressure. The impact on economic growth from these stimulative activities peaked in Q1 of 2021 and in the early of Q2 2021.

Excess bearish positioning in the fourth quarter led to or may scratch. Let me start over. It's it's it's a little too. All right.

(00:52;27) The dominant force in 2021 was really the excess stimulus that we received in late 2020 to the tune of about one and a half trillion in excess transfer payments. That led to record personal income growth. It also led to a very sharp economic recovery in goods consumption and drove much higher inflationary pressures. The impact of this stimulus really peaked in early Q1 and then a little bit into Q2 of 2021. And since then, we've seen economic growth start to slow.

Still quite strong, but slow inflationary pressures have begun to peak in late Q3 and early Q4 of 2021. And despite the slowing growth, excess bearish positioning by investors led to a rally in late Q3 early Q4 as the Delta variant eased and we saw a modest acceleration in economic activity.

(02:44;45)As we look at the fourth quarter of 2020, 2021 and in to Q1 of 2022, the economic growth slowdown is starting to broaden out the issues within China, slowing activity within Europe. And ultimately, it'll even spillover into slowing employment conditions will be a dominant factor.

Liquidity that peaked earlier in 2021 is going to continue to be an issue moving forward, and we're likely to see a lot of the narrative based investing continue to struggle as we move into 2022. Here in the first week of December, we're going to be looking at most of the fourth quarter rally behind us.

We may recoup a little bit of the losses that we experienced the week of Thanksgiving surrounding the new variant out of South Africa. But other than that, the bulk of the gains year to date have already been experienced.

As we sit here early in December of 2021 and think about the outlook for the rest of the year and into 2022, there may be an opportunity to recoup some of the losses that we experienced the week of Thanksgiving around the new variant out of South Africa.

But the reality is the liquidity environment is going to just be modestly more challenged as we move forward, which should pressure valuations and more in the more speculative areas of the market. More importantly, we're starting to see the strength in the U.S. dollar move from beyond just a short term trade to more of a trending phenomena.

And that's probably consistent with the weakness we're seeing within China and Europe and other areas in the emerging world that are struggling with the higher commodity prices. It's also worth noting that really the commodity cycle is not transitory.

While the inflationary pressures that resulted from higher commodity prices may be peaking, this commodity cycle is a little more secular in the transition to renewables is only going to accentuate it higher. That transition's very positive for fossil fuels, industrial metals, and as a byproduct of that, it's even going to push agriculture prices higher as well.

So investors are going to be forced to really think about winners and losers, probably from different sectors as we move through '22. And it's really going to start to chair, challenge some of the narratives that have kind of been at the at the investors back for the last twelve to 18 months. Think we're going to see more of the narratives fall away as more of the facts come out through 2022 and we may see a little bit more volatility and a little bit more sector rotation in 2022 than we have in 2021.



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