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Investment Commentary

The Ghosts of Past, Present and Future Markets

By Kelsey Ellsworth | Johnson Financial Group • December 22, 2021

4 minute read time

On a recent family vacation to Rosemary Beach, Florida, we noticed a gathering in the town square. It turned out to be a live performance of the classic tale “A Christmas Carol.” Inspired by the infamous Ebenezer Scrooge, I’d like to reflect here on where we’ve been and where we are going from an economic and market perspective.

A quick visit from the Ghosts of Past, Present and Future can help us look at inflation and markets as well as our growth outlook.

The Ghost of Inflation Past

U.S. CPI inflation reached over 6% year-on-year in October, which is the highest since the early 1990s. Historical data suggests that inflation over 4% has been correlated to poor equity returns whereas more moderate inflation is positively correlated to stronger equity returns.

Looking back to the 1970s, we saw high and persistent inflation, but in periods where inflation is shorter- lived, such as in the 1950s or late ‘80s, stock market returns have been more normal.

This year, with the S&P 500 up almost 20%, the markets have seemingly dismissed inflationary pressures as a reason to worry. That’s apparently due to the market’s take on the factors driving inflation—which are just as important as the rate itself.

At this point, we anticipate that once the supply chain bottlenecks work themselves out, inflation will start to normalize near the Fed’s longer-term target of around 2%. Both the number of containers sitting at the docks and freight rates have declined from the highs. Also, vendor delivery times are moving lower.

On Wednesday, as expected, the Fed announced it will begin reducing their bond purchases twice as fast. That removes some stimulus for the economy. This opens the door to short-term interest rate hikes in the new year. The Fed is allowing inflation to run hot in order to give the labor market more time to recover but recognizes there has been rapid progress in the past few months, potentially meaning hikes sooner than later.

The Fed is allowing inflation to run hot in order to give the labor market more time to recover but recognizes there has been rapid progress in the past few months, potentially meaning hikes sooner than later.

The Ghost of Markets Present

The 2021 holiday season has been off to a lackluster start. November retail sales ticked up 0.3% and categories like apparel, electronics and appliances, and furniture were all negative. These slower than anticipated sales, usually fueled by Black Friday shopping, could foreshadow sluggish sales for the month of December as well.

The first clue is a decline in weekly foot traffic data this month. The recent weakness may be a reflection of the recent Omicron variant, higher inflation, and satiated goods spending. These factors may be outshining tailwinds such as wage gains and strong consumer balance sheets. However, personal consumption expenditures, as measured by the Chase consumer card spending tracker, are still 1.2% above the pre-COVID trend, signaling demand for goods is still strong.

The auto industry is also beginning to show signs of recovery as manufacturing output rose 0.7% in November, helped by a notable 2.2% increase in motor vehicle and parts production. Output remains below pre-pandemic levels, however. These end-of-year indicators will provide greater nuance to our outlook for the new year.

The Ghost of Future Growth

The economic backdrop has been positive for equity markets over the past 12 to 18 months, but with tightening monetary policy, higher inflation, uncertain demand and the ever so rampant Omicron variant, we will likely experience greater volatility ahead.

Our outlook still remains positive, as we believe future real GDP growth will continue to increase—albeit at a slower pace following the strong rebounds seen this year. A positive for continued global growth is capital expenditure spending. We are seeing companies invest more into robotics and digitization in light of a tight labor market. These investments can increase corporate profits. A strong housing market powered by low rates and a strong demographic backdrop is also contributory to GDP growth.

Consensus estimates are for the economy to grow by 5.5% this year and 3.9% for 2022. However, positive surprises could arise if COVID cases begin to decline or supply chain headwinds ease more quickly than expected.

As we reflect on 2021 and look toward the year ahead, we’d like to stress the importance of revisiting financial plans and portfolio asset allocations. Now is a great time to reach out to your relationship manager or portfolio manager if you are anticipating changes to your financial picture in the coming year.

On behalf of Johnson Financial Group, we wish you a happy holiday season!


Kelsey Ellsworth

Kelsey Ellsworth

AVP Wealth Portfolio Manager | Johnson Financial Group

As Assistant Vice President, Wealth Portfolio Manager, Kelsey works with clients to achieve their unique goals and objectives.

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