Economic Update Future Outlook 2022

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Economic Update &

Future Outlook 2022

1Steve M. Wyett, CFAChief Investment Strategist

Presented To:

Confidential

KEY POINTS

1 The Delta variant of COVID-19 resulted in a resurgence of cases across the United States. Cases and hospitalizations continue to weigh on consumer sentiment and reduced Q3 GDP.

2

4 The Federal Reserve remains accommodative but announced plans to begin tapering this month.

U.S. consumer balance sheets are strong; and despite a decline in confidence, the hand-off from the goods recovery to the service economy is likely in the near term.

5 Equity valuations remain high by historical standards, but the outlook for equities remains attractive relative to other asset classes.

3 As the economy has reopened, supply chain disruptions and demand shocks resulted in significant inflation. This transitory inflation is lasting longer than previously thought.

6 Infrastructure spending and tax plans remain highly certain.

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BASE CASE OUTLOOK

Fed remains accommodative and fiscal policy supports

economic growth.Even as QE is tapered

fiscal policy less additive, but not

restrictive.

PolicyEconomy Markets2021-2022 U.S. strong

economic growth as economies reopen labor

markets improve & COVID impact declines.

Equity market outperforms with

broader global recovery.

Risk: COVID-19 variants that resist vaccines and

delay the reopening.

Risk: Sustainable inflation surge.

Risk: Sharply higher interest rates and taxes.

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U.S.: A SUCCESSFUL VACCINE ROLLOUT

• As of September 30th, 56% of the U.S. has been fully vaccinated.

• Vaccine hesitancy as well as the need for booster doses remains controversial.

• Recent approval of vaccines for children 5-11 will expand the percentage of the population which is vaccinated.

Source: USA Facts. Data shown as of October 31, 2021.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

75+

65-74

50-64

40-49

25-39

18-24

16-17

12-15

<12

Percentage of People Vaccinated for COVID by Age Range

Fully Vaccinated One Dose

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U.S. COVID-19 CASES

• The Delta variant raged across the U.S. over the summer despite the vaccine rollout.

• As cases rose, employers pulled back on return-to-office plans, particularly on the coasts.

• Delta has become the primary strand of COVID-19, and the infection rate remains multiples of the original strand of the disease.

• Delta cases appears to be rolling over even as schools are reopening.

Source: Our World in Data. Data shown as of October 31, 2021.

0

100

200

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400

500

600

700

800

Cas

es p

er M

illion

Daily U.S. New Confirmed COVID-19 Cases per Million People

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U.S. CONSUMER CONFIDENCE – DELTA IMPACTING

• The increase in cases, hospitalizations, and deaths despite the vaccine has negatively impacted consumer confidence.

• The decline in consumer confidence has resulted in a deceleration of the economic recovery.

Source: Federal Reserve Bank of St. Louis. Data shown as of September 30, 2021.

50

60

70

80

90

100

110

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21

University of Michigan Consumer Sentiment Index

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CONSENSUS GDP ESTIMATES

• 3Q GDP estimates ratcheted higher as a robust reopening appeared inevitable.

• More recently, 3Q GDP and 2021 GDP estimates have trended lower as Delta hit confidence.

• 2022 GDP estimates remain above trend as the recovery likely spills into next year.

• Q3 2020 first look reported at 2%.

Source: Bloomberg. Data shown as of October 31, 2021.

0%

1%

2%

3%

4%

5%

6%

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8%

GD

P Pe

rcen

t Cha

nge

U.S. GDP Forecasts

U.S. GDP Economic Forecast Q3 2021 U.S. GDP Economic Forecast 2022

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$15,000

$16,000

$17,000

$18,000

$19,000

$20,000

$21,000

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Billio

ns

Economic Growth After the Financial Crisis

Actual GDP Projected in January, 2007

• Primarily a monetary response, very little fiscal response.

• Result – slow economic recovery which lagged pre-financial crisis projections.

THE RESPONSE – FINANCIAL CRISIS

Source: Strategas.

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Source: Strategas.

THE RESPONSE – PANDEMIC

$17,000

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$20,500

'17 '18 '19 '20 '21 '22

Billio

ns

Economic Growth Since Pandemic

Actual GDP Projected GDP (latest) Projected GDP (January, 2020)

Rec

essi

on

• Concerted monetary and fiscal response.

• Recovery much faster – shortest recession in history.

• Growth expected to attain pre-pandemic projection by early 2022.

• But – the avoidance of one risk is the acceptance of another.

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U.S. HOUSEHOLDS: FINANCIAL STRENGTH

• Household net worth is at record highs. To a certain extent, this is offsetting the recent decline in consumer confidence.

• The increase in wealth is due to:• Above average savings

• Home value appreciation

• Stock market rally – stocks are 25% higher than pre-pandemic levels.

• Increased household worth is the fuel for the economic recovery.

Source: Federal Reserve Bank of St. Louis. Data shown as of June 30, 2021.

60T

70T

80T

90T

100T

110T

120T

130T

140T

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Dol

lars

($)

Households Net Worth(In Trillions of $)

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U.S.: REAL DISPOSABLE PERSONAL INCOME

14

15

16

17

18

19

20

'18 '19 '20 '21 '22

U.S.: Real Disposable Personal Income(SAAR, Tril.Chn.2012$)

Source: Strategas.

• Fiscal stimulus led to personal incomes rising even as economic growth collapsed and unemployment spiked higher.

• Impact of multiple fiscal programs can be seen in the data.

• Fiscal stimulus totaled some $5.9 trillion dollars.

• But – Note decline at end of chart.

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PERSONAL CONSUMPTION OF GOODS

• After an initial drop from the pandemic, consumption of goods rebounded to all-time highs.

• Federal transfer payments and higher savings boosted the demands for goods, which appears to be at a short-term peak.

• The booming demand for goods has led to shortages, bottlenecks, and elevated inflation.

Source: Strategas. Data shown as of September 30, 2021.

$3,500

$4,000

$4,500

$5,000

$5,500

Billio

ns o

f Dol

lars

($)

Personal Consumption ExpendituresGoods

Consumption of Goods

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SERVICES – UPSIDE POTENTIAL FOR 2022

• Services, while improving, have remained below the pre-pandemic trend.

• Services have a large multiplier effect on the economy as money spent on services tends to stay within the U.S.

• Services, such as travel and entertainment, are expected to increase through this year and into 2022.

Source: Strategas. Data shown as of September 30, 2021.

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000

Billio

ns o

f Dol

lars

($)

Personal Consumption Expenditures: Services

Consumption of Services

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IMPORTANCE OF SERVICES TO OUR ECONOMIC GROWTH

• The goods economy is 21% larger than pre-COVID levels, which led to inflation in commodities.

• The service economy is approximately the same size as pre-COVID levels.

• Services are 2x the size of the goods economy and have a great economic multiplier.

Source: Strategas.

Goods$4,541

Services$10,113

Investments

Net Exports

Government

4th Quarter 2019 GDP FiguresIn Billions

Goods$5,527

Services$10,149

Investments

Net Exports

Government

2nd Quarter 2021 GDP FiguresIn Billions

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SUPPLIERS STRUGGLE TO RESPOND TO DEMAND

• The number of days it takes to receive delivery of supplies has reached decade highs and is particularly extreme in specific sectors.

• Businesses have been unable to find labor and key production inputs resulting in longer lead times for delivery of goods.

• This has contributed to higher inflation near-term, which is expected to trend downward as stimulus demand fades, shipping bottlenecks clear, and manufacturing picks back up.

Source: Bloomberg. Data shown as of September 30, 2021.

35

45

55

65

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1990 1995 2000 2005 2010 2015 2020

ISM Manufacturing Report on Business Supplier Deliveries

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INFLATION IS OUR GREATEST CONCERN

• With supply chain disruptions and a massive rebound in the demand for goods, producer inflation has risen to a twenty-year high.

• Though producers have been able to pass this inflation through to customers, if customers balk, the economy will slow.

• It’s the uncertainty surrounding price stability that has negatively impacted consumer confidence.


-10

-5

0

5

10

15

U.S. PPI Finished Goods

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COMMODITY PRICES

• The initial surge in demand overwhelmed the supply in many commodities, leading to price surges.

• Recent price action shows some commodity prices declining.

• Chinese demand for commodities appears to be decelerating in anticipation of the 2022 Beijing Winter Olympics.


$400

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Dec Jan

Feb

Mar Ap

r

May Jun

Jul

Aug

Sep

Oct

Lumber

$300$320$340$360$380$400$420$440$460$480$500

Copper

$600

$700

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$900

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Jan Mar May Jul Sep Nov

Iron

$45

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Jan Mar May Jul Sep Nov

Oil

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WAGES – ANOTHER INFLATION RISK

• Not surprisingly, the leisure and hospitality industry has been one of the leading areas of wage inflation.

• Hourly wages need to continue to increase in lower-earnings jobs to encourage workers to return to employment.

• The $300 supplemental unemployment benefit kept some employees from returning to work.


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'84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

NFIB Small Business Job Openings Hard to Fillvs.

NFIB Small Business Compensation Index

Small Business Job Openings Hard to Fill (L) Small Business Compensation Index (R)

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BREAKEVEN CURVE EXPECTS INFLATION TO BE TRANSITORY

• With the economic reopening and the resulting surge in demand, inflation is expected to remain above average over the next year, before trending downward.

• The Fed expects inflation to remain ‘transitory’ as the reopening continues, and supply and demand become more in balance.

• The biggest risk to the economy is that inflation persists at high (above 2.5%) levels.

Source: Bloomberg. Data shown as of October 31, 2021

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

3.1%

3.3%

1 2 3 4 5 6 7 8 9 10Breakeven Maturity

CPI Forecast ImpliedBy U.S. Treasury Inflation Protected Securities

Today

December 31, 2020

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FEDERAL RESERVE’S NEW MONETARY POLICY FRAMEWORK

• Short-term rates are expected to remain near 0% until three conditions are met:• Economy reaches maximum

sustainable employment.

• Inflation has reached 2%.

• Inflation is on track to moderately exceed 2% for some time.

• The Fed wants to see real economic progress toward goals rather than forecasts.


0%

2%

4%

6%

8%

10%

12%

14%

16%

%

Unemployment vs. Inflation

Inflation Target

Unemployment (U3)

Inflation (Core PCE)

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THE FED’S TIMELINE FOR QUANTITATIVE EASING EXIT

Start of QE Tapering First Hinted

Tapering Announced

Tapering Started

Tapering Ended

First Rate Hike

QE3 September 2012

May 2013 December 2013

January 2014 October 2014 December 2015

Current QE March 2020 From the Beginning

November 2021

November 2021

Early Q3 2022 Q1 2023 or Later

• The Fed is expected to keep monetary policy accommodative longer.

• While the FOMC has not detailed the specific exit sequence from the ongoing QE, Fed Chair Powell has suggested it will follow a similar sequence to the exit of QE3.

Source: Cornerstone Macro

Timeline for QE3 Exit and Plausible Timeline for Current QE Exit

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3.125 ××3%

2.8752.75%2.625 ×2.5% ×××××××××2.375 × ×

2.25% ××××2.125 ××××××

2% ×1.875 ×

1.75%1.625 ××× ××1.5%1.375

1.25% ×××1.125 ××××××

1%0.875 × ×××

0.75%0.625 ××× ××× ×0.5%0.375 ×××××× ××××

0.25%0.125 ×××××××××××××××××× ××××××××× ×

0%Target 2021 2022 2023 2024 Long Term

FED INTEREST RATE HIKES ARE STILL A LONG WAY OFF

• The FOMC projects Fed Funds lift-off to occur in 2023.

• Forecasting gradual increases of 3 hikes in 2023, followed by 3 hikes in 2024.

• Market based Fed Funds futures doubt the Fed will be able to hike rates above 2% in long term.


The Fed ‘Dot Plot’

Impl

ied

fed

fund

s ta

rget

rate

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DESPITE LOW RATES, DEMAND WILL REMAIN FOR U.S. TREASURIES

• Will a decline in Fed purchases result in a rate surge?

• When compared with bonds around the world, U.S. Treasuries yield substantially higher than many other countries.


-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2016 2017 2018 2019 2020 2021

Inte

rest

Rat

e (%

)

Global 10-Year Treasuries

United States Great Brit Germany Austrailia Japan

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PROPOSED SPENDING

• Total spending will, in all likelihood, be lower than $3.5 trillion.

• The economic impact of this spending is very different than earlier pandemic stimulus plans.

$1,240

$850

$540

$450 $425

$0B

$200B

$400B

$600B

$800B

$1,000B

$1,200B

$1,400B

Safety Net Health Education Energy Housing

Estimated Allocation of Biden's Proposed $3.5 Trillion Spending, $BN

Source: Strategas.

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IMPACT OF FISCAL POLICY AND CONTRIBUTION TO ECONOMIC GROWTH

• Fiscal policy during the COVID-19 pandemic has been extraordinary.

• In future years, fiscal stimulus could turn to a headwind as the economy deals with lower rates of fiscal stimulus.

10.40%

11.40%

2.30%2.80%

0.90%

0%

2%

4%

6%

8%

10%

12%

2020 2021 2022 2023

% o

f GD

P

Fiscal Policy Stimulus,% of GDP, Fiscal Year

With Passage of Biden's

Entire Fiscal Agenda

Source: Strategas

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PROPOSED TAXES

• Total taxes probably less.

• President and House have provided proposals, the Senate is next.

• Slim Democratic Majorities make passage as proposed harder.

$1,000$964

$700

$600

$96

$14 $4 -$5

-$200B

$0B

$200B

$400B

$600B

$800B

$1,000B

$1,200B

Individual Corporate Pharma Dny Scoring Tobacco Enforcement Retirement Other

Allocation of the House's Proposed Tax Increases & Spending Offsets, $BN

Source: Strategas.

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S&P 500 VALUATIONS REMAIN HIGH

• Relative to history, the S&P 500 is historically expensive.

• However, the interest rate environment makes historical comparisons difficult.

• Economic growth in 2021 may be the strongest we’ve seen in decades.

• Increased corporate taxes may likely be a headwind in 2022.

Source: FactSet. Data shown as of October 31, 2021.

Oct-21:21.38

20 year average: 15.70

+ 1 Std. dev.: 18.43

- 1 Std. dev.: 12.96

8

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24

26

Pric

e to

Ear

ning

s (%

)

S&P 500 Next Twelve Months Price to Earnings Ratio

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AT ALL-TIME HIGHS, STOCKS ARE STILL RELATIVELY CHEAP

• Bonds appear expensive when compared with other asset classes.

• Quantitative easing has potentially front-loaded stock market gains.

• Stocks remain expensive relative to history. But compared with other asset classes, stocks appear attractive.

11.015.2 17.9 18.7 21.8 19.0

26.718.1

12.5 11.719.5 20.1 17.7

24.321.113.6 9.9

15.523.8

44.4

81.3

0X

10X

20X

30X

40X

50X

60X

70X

80X

90X

'60s '70s '80s '90s '00s '10s Current

Pric

e to

Ear

ning

s R

atio

Average P/E by Decade

Housing Stocks Bonds

Source: Strategas. Data shown as of August 31, 2021. Bonds do not have a Price/Earnings ratio, but for comparison, we are showing bonds based on the price divided by the interest rate to create comparability. Housing represents U.S. median home price / median rent.

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CONCLUSIONS

• Optimistic on economic growth.

• Labor market holds key to economic expansion and inflation.

• Favor equites over fixed income and cash.

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Disclosures

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Economic Update Future Outlook 2022