10 Themes for 2022 - Carrying The Torch

Featuring: Lawrence V. Adam III, CFA, CIMA^®, CFP^®
Chief Investment Officer

Raymond James’ Chief Investment Officer Larry Adam was inspired by the Winter Olympics as he laid out his Ten Themes for 2022. The future path of the Fed was front and center, along with a potential upside to inflation, the state of global supply chains, and the future of fixed income. “Ten Themes for 2022: Carrying the Torch” was presented on Monday, January 10, 2022.

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1. The US Economy Is Ready To Take Off

INSIGHT: The availability of multiple, effective vaccines allowed for a sustainable reopening, but it was the combination of accommodative monetary policy and unprecedented fiscal stimulus that helped the recovery gain momentum.

BOTTOM LINE: The US economy should post its second consecutive year of above-trend growth as the gradual transition to the endemic state occurs. Healthy consumer cash balances and the steady rebuilding of inventories should also bolster growth.

2. The Fed Must Adeptly Navigate The Fast-Moving Economy

INSIGHT: The pace of economic growth and inflation has forced the Federal Reserve (Fed) to start debating the details of the impending tightening cycle, with market expectations and the most recent dot plot signaling three interest rate hikes in 2022 .

BOTTOM LINE: We expect slowing economic growth, dissipating inflationary pressures, talk of the yield curve inverting, and the more dovish voter composition to allow for a still patient, relatively accommodative Fed.

3. Yields Will Swerve Between The Gates

INSIGHT: Historically, after each successive tightening cycle, the 10- year Treasury yield failed to reach its previous peak level. While Treasury yields have moved slightly higher, the upside will be capped due to less government issuance, demographics, and globalization trends.

BOTTOM LINE: As the Fed unwinds accommodative policies, yields should move slightly higher, making for a challenging environment for fixed income returns. Bonds should be used to protect against equity risk, and periodic bouts of volatility could create opportunities in the corporate credit markets.

4. The Democratic ‘Blue Wave’ Is Skating On Thin Ice

INSIGHT: For all the perceived dysfunction in DC, politics have not hindered the economy or the financial markets, and both parties have been able to secure high-priority policies in recent years (e.g., Republicans—corporate and individual tax cuts, Democrats—COVID-induced stimulus).

BOTTOM LINE: History suggests the incumbent party tends to lose seats in the House of Representatives during the midterm elections, making gridlock the anticipated outcome. As such, any major policy shifts are unlikely.

5. Equities Transition From Power & Speed To Targeted Precision

INSIGHT: The equity market rally has been fast paced and powerful, but as the bull market enters its third year, precision will be necessary. With valuations at elevated levels, it will be earnings growth rather than multiple expansion that continues to drive equities higher.

BOTTOM LINE: Earnings should move higher in the midst of robust economic growth and still healthy margins. The continuation of shareholder -friendly actions and a still low interest rate environment should also help the S&P 500 reach the 5,000 level for the first time.

6. Sector Exposure Will Steer Small Cap In The Right Direction

INSIGHT: Our economic growth expectations for this year, more specifically the uptick in services spending, should be supportive of small -cap equities. From a sector composition perspective, small -cap equities are exposed to our preferred cyclical areas of the economy.

BOTTOM LINE: Relative to the S&P 500, valuations are trading at the lowest level on record. Combined with strong earnings growth expectations, small -cap equities should present an opportunity for investors.

7. There Are No ‘Bindings’ On Technological Re-Invention & Adoption

INSIGHT: Technology has had to reinvent itself in order to continue its incessant revolution and contributions to productivity. Between veteran catalysts such as cloud computing and 5G and newcomers such as artificial intelligence and the Metaverse, the digital age seems limitless.

BOTTOM LINE: The seemingly expensive tech valuations are justified by the continued strength in earnings and the fact that business plans for future tech spending are near record highs.

8. Focusing On US Equities’ Consistent Stride

INSIGHT: With supply chain bottlenecks, COVID surges causing temporary economic setbacks, and varying policy responses, it is difficult to select a favored equity region for the short term.

BOTTOM LINE: In the long run, profitability ratios favor domestic equities. However, attractive valuations, involvement in high-growth tech-oriented industries, and the scope for additional fiscal stimulus measures could make the Asian emerging markets an area of opportunity.

9. Oil Price Dynamics Will Find Their Balance

INSIGHT: The trajectory of the energy market has been tumultuous, with COVID case surges, inventory releases, and natural disasters complicating supply and demand dynamics.

BOTTOM LINE: As supply and demand continue to normalize, especially as the world transitions to the endemic state, oil prices above the $80 per barrel threshold will be short-lived. With oil prices no longer below breakeven levels, further investment in the renewable energy space is likely to occur.

10. Look Below the Surface For Opportunities

INSIGHT: As the economy reopened and earnings recovered, the equity markets only experienced one 5%+ pullback last year – it usually experiences at least three.

BOTTOM LINE: As the bull market ages and as headlines related to the Fed’s tightening cycle, COVID, midterm elections, and geopolitics circulate, the equity market is likely to experience more volatility relative to last year.