2022 Outlook – A New Year of Challenges and Opportunities Ahead

The economy and markets in 2021 were fueled by significant government spending and loose monetary policy yielding strong economic growth and stock market gains.

U.S. stock markets were up 14-27%, depending upon the index one favors.  The S&P 500 Index was the clear winner, being up 27%. The S&P 500 Index top five holdings are: Apple Inc “AAPL”, Microsoft Corp “MSFT”, Amazon.com Inc. “AMZN”, Tesla Inc. “TSLA”, and Alphabet Inc. “GOOGL”. These five stocks represent 23% of the 500-stock index.

The 1.9 trillion American Rescue Plan Act of 2021 and the Federal Reserve’s “FED” $120 billion per month bond buying program fueled the extraordinary economic growth and stock market returns. 

We expect government spending will be constrained in 2022 as compared to 2021.  The FED has already reduced its bond buying program.  This should come to an end by May 2022. Economic growth should slow in 2022 with GDP of approximately 4%, and still greater than the U.S. economy’s long term 2.5% annual trend.

Inflation is the most significant economic issue facing our economy in 2022 in our opinion.

Money supply (M2) expanded by an astounding 40% since the beginning of the pandemic.  As supply was constrained due to businesses shutting down periodically across the globe and extraordinary government spending both contributed to the current 6.0% inflation, well greater than the FED’s 2.0% target. The FED has the great challenge of curtailing inflation by slowing down the economy, while keeping employment and the economy expanding.  We expect interest rates to rise in 2022 as the FED become more restrictive with monetary policy.

The stock market will likely experience heightened volatility in 2022 with periodic declines of 10% or more (3,600 Dow Jones Index points).

This potential volatility is precisely why we recommend that clients maintain sufficient cash and short-term bonds “safety funds” to fund three years of spending needs. Timing the market by jumping out of the market and then back in is a futile strategy.

Richard S. Lawrence, CFA / January 6, 2022

SCHEDULE A CONSULTATION

 

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES!

New COVID Variant and Federal Reserve Front and Center

Global and domestic stock markets were sent reeling in November following reports of a new coronavirus strain, despite some positive economic news. Markets respond to uncertainty by hitting the SELL button and asking questions later.   

As a few days past, evidence suggests this new coronavirus strain, Omicron, may be more contagious than previous variants but cause less severe illnesses.

Federal Reserve Chair Jerome Powell indicated that the coronavirus variant could hinder economic recovery efforts and impact the country’s response to surging inflation.

Nevertheless, Powell also suggested the central bank could end its asset purchase program a few months sooner than planned, apparently signaling confidence in the economic recovery, despite concerns over the Omicron variant. Inflation continued to rise, as supply-chain bottlenecks and labor shortages prompted price hikes at both the manufacturing and retail levels.

The ”Build-Back-Better” $1.7- $4.8 trillion social spending bill appears to be on the ropes in the halls of Congress.

Although the House passed its version of the bill it has yet to be sent over to the Senate for consideration.  Two key roadblocks have emerged: 1) two moderate democratic senators have not committed to sign such a wide sweeping social reform bill; and 2) there are components in the bill that go beyond “budgeting” which may require 60 votes in the Senate to pass and not a simple majority.  We believe that a bill to expand federal government spending by 10-15% being funded by substantially higher income, capital gains, and estate taxes would result in lower economic growth and possibly “stagflation” (inflation with economic stagnation).

Richard S. Lawrence, CFA / December 20, 2021

SCHEDULE A CONSULTATION

 

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES!

Proposed U.S. Government Spending and Tax Reform – Washington Gone Wild

$6.5 trillion of additional federal spending has passed or debated this year. 

To put this issue in perspective, the U.S. Federal annual budget was $4.3-4.5 trillion with a $600 billion structural deficit pre-pandemic.  In March 2020 when the pandemic was taking hold, Congress passed, and the President signed the CARES Act providing $2.2 trillion of direct support to the economy in the form of payments to individuals and businesses.  In early 2021 when the economy was recovering, the $1.9 trillion AMERICAN RESCUE PLAN was signed into law with appropriations of $1.5 trillion allocated for 2021 and 2022. Congress is debating a $1.1 trillion infrastructure bill and another $3.5 to $4.0 trillion bill to expand entitlements and climate initiatives

How will the U.S. Government pay for this massive spending you may ask?

What comes to mind is the image of the scarecrow in The Wizard of Oz with his arms crossed, totally perplexed, not knowing the way to Oz. Undeterred, he joined Dorothy for his journey to Oz.  Many proposals were floated including eliminating the investment stepped-up basis and taxing unrealized gains for estates.  Recently, a 3.8% tax on unrealized gains for billionaires was proposed and scrapped within days. Corporate income taxes will likely increase from the current 21% statutory rate.   Major economies around the world impose corporate tax rates between 20-25%.  U.S. corporate tax rates could increase modestly and remain competitive on a global basis.  In summary, Congress appears to be in a logger jam with spending programs and tax reform.

Inflation is alive and well with consumer prices up 5.4% and producer prices rising 8.6%, well higher than the Federal Reserve “FED” 2.0% inflation target.

Everyday workers take the biggest brunt from inflation. Wages are rising by 4.9% and being wiped out by rising prices. Investors are not immune either. The degree to which stock markets’ total return exceeds inflation typically declines. If the above noted spending programs are passed into law, we believe these spending programs will ensure inflation will remain well above the FEDs 2.0% target.  

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES

Why Do Investors Short Stocks?

Why do investors short stocks? “Shorting’ stocks is a strategy to profit from a decline of a stock’s price. Investors use this strategy to “hedge” an investment portfolio, profit from a decline of a stock’s price, or to lock-in the value of a stock without selling the stock.

Example of shorting a stock:

Stock Ticker: SHRT
Current Price: $25
Hypothetical (A) Future Price: $30
Hypothetical (B) Future Price: $20

Investor shorts stock “SHRT” at $25:

Investor borrows 1,000 shares of SHRT from a financial firm having custody of shares in street name. Investor sells the borrowed 1,000 shares SHRT and receives $25,000 cash into investor account. Investor “covers” short position by buying the 1,000 shares of SHRT and returns the borrowed shares to the financial firm which lent the shares. The “lending” firm charges interest on the shares being borrowed also called “margin debt”.

Two Scenarios:

  1. SHRT price declines to $20/shareInvestor buys 1,000 shares at $20 in the open market at a cost of $20,000. Investor delivers the previously borrowed 1,000 shares back to the lender.  Investor profits $5,000.
  2. SHRT price increase to $30/share: Investor buys 1,000 shares at $30 in the open market at a cost of $30,000. Investor delivers the previously borrowed 1,000 shares back to the lender.  Investor loses $5,000.

A “Short squeeze”

 A short squeeze occurs when an investor (usually an institution with a large short position) scrambles to buy shares as a stock’s price is rising.  If the stock is illiquid the price may rise rapidly as sellers become reluctant to sell. The short seller is “squeezed” and must pay higher prices for the stock as the investor attempts to “cover” their short position.

Shorting is used to reduce a portfolios overall market exposure, thereby reducing the portfolio risk profile.

One very useful use of this hedging technique is to defer a capital gain. If an investor owns “ABC” at $50 per share with a $10 cost basis, the investor will incur a $40/share capital gain if sold.  If the investor would like to “lock-in” the $50 value but not sell the stock until a future date, the investor could short ABC. If ABC increases to $55 the investor would gain $5 from ABC long position, and lose $5 from the short position.  Conversely, if ABC declines by $5 per share, the ABC holding would decline by $5 and the investor would profit $5 from the short position. The investor would incur the borrowing cost relating to the short position.

While shorting is an excellent hedging technique, the risk is unlimited. Shorting should only be done by investors well informed about the risks involved.

Note: Past performance is not an indicator of future results. Investors could lose money investing in the stock and bond markets, among other capital markets.

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES

Responsible Investing Performance

Our “Responsible Investing” stock portfolio, +25.5% in 2020, once again outperformed the S&P 500 Equal Weight Index.  The objective of this portfolio is to invest in stocks of companies with superior operating performance. These companies employ responsible policies in the areas of the environment, community and employees, and corporate governance.  This RI portfolio has performed well when markets are rising. It continues to exhibit excellent protection in down markets.  During the four-year period 2017 through 2020, our RI portfolio was up 89.5% in contrast to the S&P 500 Equal Weight Index up 47.9%, and the Dow Jones Industrial Index up 55.0%, all on a cumulative basis.

We made a few changes to the portfolio in January 2021.  We removed Cisco Systems Inc. “CSCO” and added Fiserv Inc “FISV” and Texas Instruments Inc. “TXN” to the portfolio.

Interest in Socially Responsible Investing “SRI” has gained popularity during the past five years and is now a part of many pension funds primary objectives.  Years ago, Responsible Investing portfolios primarily excluded stocks of companies operating in fossil fuels, tobacco, alcohol, and firearms to name a few.  SRI methodology has changed significantly and now has an inclusion methodology rather than exclusion.  Included are stocks of companies which employ responsible policies in the areas of environment, society, and corporate governance i.e. “ESG”.

We are pleased to offer the “Responsible Investing” stock portfolio to clients.  If interested in our Investment Management and Financial Planning services, please contact Rich Lawrence at 215-540-0896 or at rich@lawrencewealthmanagement.com.

Note: Past performance is not an indicator of future results. Investors could lose money investing in the stock and bond markets, among other capital markets.

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES

9 Years and Counting

Lawrence Wealth Management is proud to announce that Rich Lawrence has been named a Five Star Professional Wealth Manager for the ninth consecutive year.

Founded in 2003, the Five Star award program is the largest and most widely published award program in North America, covering more than 45 major markets. Professionals recognized as award winners are published by Five Star Professional and its partners. Award winners cannot pay a fee to be included in the research or the final list of award recipients.

Beginning in 2012, Rich has been named a recipient of this prestigious award every year and 2020 marks his ninth year of this recognition. Learn more about the award and how Lawrence Wealth Management can help you by scheduling a consultation.

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES