Q1 2022 Economic and Market Outlook: Years in Weeks
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Cerity Partners Market & Economic Update
March 17, 2022
Q1 2022 Economic and
Market Outlook:
Years in Weeks
Presented by:
Benjamin A. Pace, III James Lebenthal, CFA Thomas Cohn, CFA
Chief Investment Officer Chief Equity Strategist Deputy Chief Investment Officer
Key Themes for the 2022 Short Term Themes 1. U.S. consumers strength tested by higher commodity prices 2. Cyclical Stocks Make a Second Comeback 3. Expect Moderate Stock Returns With Higher Volatility 4. No Breakout in Interest Rates (DESPITE the FED in Tightening Mode) 5. Labor Markets Heal 6. Supply Chain issues SLOWLY dissipate, and Inflation GRADUALLY Normalizes 7. China Is No Longer the Driver of World Economic Growth Long Term Themes 1. Continued Financial Repression Necessitates a Never-ending Search for Yield (Watch Real Yields) 2. Transition Towards Clean Energy/ ESG Driver in the Commodity Markets (demand and supply) 2
Kickstarting 2022
The market has been discounting speculative assets for over a year.
January & February 2021 February 2021 Through March 3rd, 2022
40% 20% 16.17% 15.32%
35.00% 11.00%
35% 10%
30%
0%
25%
-10% -6.67%
20%
-20%
15%
11.35%
-30%
10% -30.33%
5.00% 4.92% 5.69% -34.93%
4.72% -40%
5%
1.70%
-43.07%
0% -50%
-51.07%
-0.82%
-5% -60%
iShares Core iShares iShares iShares ARK Defiance Grayscale iShares iShares Core iShares iShares iShares ARK Defiance Grayscale iShares
S&P 500 ETF Russell 1000 Russell 1000 Russell 2000 Innov ation Next Gen Bitcoin Trust China Large- S&P 500 ETF Russell 1000 Russell 1000 Russell 2000 Innov ation Next Gen Bitcoin Trust China Large-
Growth ETF Value ETF ETF ETF SPAC (BTC) Cap ETF Growth ETF Value ETF ETF ETF SPAC (BTC) Cap ETF
Derived ETF Derived ETF
3 Source: Factset
Uptick in Volatility
Uncertainty has reasserted itself in 2022.
The VIX The History of Recent Market Corrections
90
COVID 19 Pandemic
Global Financial Crisis Current Correction (51 Days) -11.91%
80
COVID Economic Shutdown (33 day s) -33.90%
70
Trade Wars/ Fed Pivot (95 day s) -19.80%
60 Fed
Pivot VIX Product Implosi on (13 days) -10.20%
Euro U.S. Treasury 2.0 /
Crisis Downgrade Russia
50 LTCM Enron China/Energy Invades Commodity Downcycle / HY Sel l-Off (100 days)
9/11 -13.30%
Asian Slowdown Ukraine
Fed
40 Financial Pivot
Crisis China Devaluation (96 Day s) -12.40%
30
U.S. Debt Downgrade (157 days) -19.40%
20
European Debt Crisis (70 days) -16.00%
10
Global Financial Crisis (517 days) -56.80%
0 -70% -60% -50% -40% -30% -20% -10% 0%
Oct-91 Feb-96 Jun-00 Oct-04 Feb-09 Jun-13 Oct-17 Feb-22
4 Source: Factset, Yardeni Research
Geopolitics to the Forefront
Russia’s invasion of Ukraine has become the biggest risk to the markets.
Russian Ruble to U.S. Dollar Geopolitical Events and the Markets
0.0150
0.0140
0.0130
0.0120
0.0110
0.0100
0.0090
0.0080
Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22
5 Source: Factset, LPLImpact to Global GDP
While fiscal policy is wearing off, pent-up demand plus excess savings translate into consumer spending fueling
GDP growth.
Three Ways to Impact the Global Economy Biggest Impact From Cutting Russia Off Will be on Commodites
Financial Risk spreads, valuations,
Markets banking system, contagion
risk, capital flows, currency
risk
Economic Trade flows, economic
disruption, supply side
Markets shocks
Geopolitical Long-term instability,
globalization, global
Structure
monetary system
6 Source: Factset, Maroon MacroSupply Shocks Everywhere
Commodity prices are being forced upward by supply disruptions. War in Europe has further propped up
commodities.
Commodities Oil Industrial Metals
200 200 200
180
175 175
160
140
150 150
120
125 100 125
80
100 100
60
40
75 75
20
50 0 50
Dec-19 May-20 Sep-20 Jan-21 Jun-21 Oct-21 Mar-22 Dec-19 May-20 Sep-20 Jan-21 Jun-21 Oct-21 Mar-22 Dec-19 May-20 Sep-20 Jan-21 Jun-21 Oct-21 Mar-22
Bloomberg Commodity Index - Total Return Crude Oil WTI (NYM $/bbl) Continuous - Total Return Bloomberg Industrial Metals Subindex - Total Return
7 Source: FactsetBarometers of Risk
We are watching the bond and credit markets for signs of risk off.
Yield Curve Watch High Yield Spreads
3.5% 1,200
3.0%
1,000
2.5%
800
2.0%
1.5%
600
1.0%
400
0.5%
0.0% 200
-0.5%
0
-1.0% Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Mar-88 Jun-92 Sep-96 Dec-00 Mar-05 Jun-09 Sep-13 Dec-17 Mar-22 ICE BofA US High Yield - Spread - Spread to Worst
8 Source: FRED, FactsetTwo Economic Levers
We would expect both growth and inflation rates to decelerate in 2022.
Growth Inflation
70 7%
Mid Cycle Slowdowns
65
6%
60
5%
55
4%
50
3%
45
2%
40
1%
35
0%
30
Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-14 Dec-17 Dec-20
Feb-97 Feb-00 Feb-03 Feb-06 Feb-09 Feb-12 Feb-15 Feb-18 Feb-21
Core CPI (Year over year %)
United States - ISM Manufacturi ng PMI
9 Source: Factset, FREDA New Wave
Expect a short-term impact on growth from Omicron.
Hospitalizations in the U.S. Seated Diners on the OpenTable Network
180,000 80%
160,000 60%
140,000 40%
120,000 20%
0%
100,000
-20%
80,000
-40%
60,000
-60%
40,000
-80%
20,000
-100%
0 Feb 18 May 24 Aug 28 Dec 02 Mar 08 Jun 12 Sep 16 Dec 21
Jul-20 Oct-20 Dec-20 Feb-21 May-21 Jul-21 Oct-21 Dec-21 Mar-22
United States 7 Day Average
Hospital Patients
10 Source: Our World in Data, OpenTableNever Underestimate the U.S. Consumer
While fiscal policy is wearing off, pent-up demand plus excess savings translate into consumer spending fueling
GDP growth.
U.S. Total Retail Sales The Goods vs. Services Recovery
$700 140
$650 130
122
120
$600
114
110
$550
100 100
$500
90
$450
80
$400
70
Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21
$350
Real Personal Consumption Expendi tures: Durable Goods
Real Personal Consumption Expendi tures: Services
$300
Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Real Personal Consumption Expendi tures: Nondurable Goods
11 Source: Factset, FREDThe Case for Investing
Capital expenditures and the housing market can contribute to GDP growth.
Capital Investment U.S. Housing Starts
20% 2,500
15%
2,000
10%
5%
1,500
0%
-5% 1,000
-10%
500
-15%
-20%
Sep-06 Mar-08 Sep-09 Mar-11 Sep-12 Mar-14 Sep-15 Mar-17 Sep-18 Mar-20 Sep-21 0
Real Gross Private Domestic Investment, Fi xed Investment, Nonresidential Dec-02 Sep-05 Jun-08 Mar-11 Dec-13 Sep-16 Jun-19
Real Gross Private Domestic Investment, Software New Privatel y Owned Housing Units Started (6 Months Average)
12 Source: FactsetWhat Is Causing the Supply Chain Bottlenecks?
Adverse Weather Can’t control and unknown
Labor Shortages Mix of permanent and temporary changes
Should fade in 2022 (depending on
Supply Restrictions
sanctions)
Demand Shifts (Services to Goods) Should fade in 2022
ESG Policy Could be permanent
13 Source: Capital EconomicsThe Choking of Supply Chains
Emerging signs that the supply chain pain has peaked.
New York Fed Global Supply Pressure Index Shipping Rates
5 $14,000
4 $12,000
3
$10,000
2
$8,000
1
$6,000
0
$4,000
-1
$2,000
-2
$0
Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Mar-22
-3
WCI Shanghai to Los Angeles Container Rate
Feb-98 Feb-01 Feb-04 Feb-07 Feb-10 Feb-13 Feb-16 Feb-19 Feb-22
14 Source: Federal Reserve Bank of New York Liberty Street Economics, BloombergSigns that Inflation Will Likely “Normalize” in the back of half 2022
Core inflation will likely start to taper this year.
Energy & Food as a % of Total Spending Goods vs. Service Prices
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
Nov-01 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17 Nov-19 Nov-21
Consumer Price Index for All Urban Consumers: Durables
Consumer Price Index for All Urban Consumers: Services
15 Source: JPMorgan, FREDUnfreezing the Labor Markets
Don’t pay attention to the unemployment rate.
The Jobs Recovery Labor Force Participation Rate
68%
66%
64%
62%
60%
58%
56%
Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18 Dec-21
16 Source: Calculated Risk, FREDThe International Markets Discount
Europe’s proximity and energy exposure to Russia are likely to be headwinds to economic growth.
Forward P/E Ratios IMF Real GDP Forecasts
26x 8.0%
7.2%
24x 7.0% 6.7%
6.2%
22x 6.0% 5.8%
5.6%
20x 4.9%
5.0% 4.7%
18x 4.0%
4.0% 3.8% 3.8% 3.8%
3.5%
16x
3.0% 2.6% 2.7%
2.5%
2.2% 2.3%
14x
2.0% 1.8%
12x
1.0%
10x
Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21 Aug-21 Nov-21 Feb-22 0.0%
iShares Europe ETF - PE - NTM iShares MSCI Japan ETF - PE - NTM U.S. Germany France Italy Spain U.K
iShares Core S&P 500 ETF - PE - NTM 2021 2022 2023
17 Source: Factset, IMFNo Longer the Growth Engine
The regulatory actions in the education, housing, and health sectors are another headwind to Chinese
growth.
Real Chinese GDP Growth First In, First Out?
170
12%
10% 9.6% 150
7.8% 7.8% 8.0%
8% 7.4% 130
7.0% 6.9% 6.9%
6.8%
6.0%
6% 5.6% 110
5.3% 5.2% 5.1%
4% 90
2.3%
2%
70
0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 50
Dec-19 Jul-20 Jan-21 Jul-21 Feb-22
Real GDP Growth IMF Forecast MSCI Chi na NR USD MSCI India NR USD MSCI EM NR USD
18 Source: Factset, Morningstar DirectThe Wrecking Ball?
The Fed tightening cycle can pressure asset markets, but usually after overtightening.
Fed Funds Rate Two Year Treasury Yield
7%
3.5%
6%
3.0%
5%
2.5%
4%
2.0%
3%
1.5%
2%
1.0%
1%
0.5%
0%
Dec-92 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13 Dec-16 Dec-19 Dec-22
U.S. Federal Funds Target Rate Market Expecations 0.0%
Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
19 Source: JPM Guide to the Markets, FactsetCurrency Risks
The weaponization of the financial system has brought the dollar back into focus.
The Dollar Back in focus Alternative Store of Values?
105 110
105
100
100
95
95
90
85
90
80
85 75
70
31-Dec-2021 21-Jan-2022 11-Feb-2022 4-Mar-2022
80
Mar-17 Sep-17 Apr-18 Oct-18 May-19 Dec-19 Jun-20 Jan-21 Jul-21 Feb-22 Bitcoin (BTC/USD) - Price NY Gold (NYM $/ozt) - Price
20 Source: FactsetWall of Worry Risks are always present. They exist in balance with opportunities. Bricks In The Wall Climbing Gear • Geopolitical Risks • Fading Virus Impact • Supply Chain Bottlenecks • High & Growing Profits • Inflation • Supply Chain Onshoring • Interest Rates • Infrastructure Spending • Federal Reserve • Plentiful Jobs • Infrastructure & Taxes • Growing GDP • Social Discord • Fading Fiscal Policy Distortions • Political Disfunction • Fading Monetary Policy Distortions • Climate Change 21
Return to Normal What does that mean? 1. Lower Equity Market Returns than past ten years 2. Higher Volatility than last two years Normal is likely to not “feel good” after the recent past 22 Source: Factset
Do Not Try to Time a Correction . . . Or the Markets!
Note How Long the S&P 500 Stayed Above the 200 Day Moving Average. Normal Volatility is reasserting
itself.
S&P 500 Performance of the S&P 500
Performance of a $10,000 investment between January 1, 1999 and December 31, 2018
23 Source: Yahoo Finance, FactsetEquity Expectations for 2022: A Return to Normal
The last ten years has seen much better than average returns due to earnings multiple expansion.
S&P 500 Annualized Returns
1 Year 3 Year 5 Year 10 Year 20 Year
15.76% 20.08% 16.22% 15.08% 9.17%
Note This
Corrective Decline
24 Source: Yardeni ResearchEarnings are the Lifeblood of the Stock Market Earnings Are Still Being Revised Higher As Of March 10th S&P 500 Operating Earnings per Share 25
Earnings are the Lifeblood of the Stock Market Earnings Are Still Being Revised Higher As Of March 10th S&P 500 Earnings per share Forecasts 26 Source: I/B/E/S data by Refinitiv
Why are Earnings Estimates Not Declining?
Because Demand is Hanging In
TSA Traveler Count - Trailing 12 Months
Number of Dai ly Travellers % of 2019 Level 14 per. Mov. Avg. (Number of Daily Travellers)
2,750,000 140.0%
2,550,000
120.0%
2,350,000
2,150,000 100.0%
1,950,000
80.0%
1,750,000
60.0%
1,550,000
1,350,000 40.0%
1,150,000
No let up in demand for air travel 20.0%
950,000
despite Russia-Ukraine.
750,000 0.0%
3/14/2021 4/14/2021 5/14/2021 6/14/2021 7/14/2021 8/14/2021 9/14/2021 10/14/2021 11/14/2021 12/14/2021 1/14/2022 2/14/2022
27Why are Earnings Estimates Not Declining? Because Demand is Hanging In Las Vegas Strip – Recent RevPAR Trends 28 Source: Company reports at J.P. Morgan
Anecdotally, things look pretty good here in the U.S. Some will say Europe is in recession, but the US matters more. 29
Stock Market Valuation Has Come In May 17, 2017 – March 14, 2022 SPDR S&P 500 ETF Trust (SPY-US) 30
Fundamentals of Four Overweighted Sectors in R1000 Value
Financials
• Yield curve rises and steepens as Fed tapers: helps banks’ net interest margins
• Improving economy reduces loan losses and promotes loan growth
• Share buybacks increase earnings per share
Energy
• OPEC+ is behaving rationally
• Demand for fossil fuel picks up with economic expansion
• Renewable energy sources need fossil fuels during construction
Industrials
• Benefit from economic recovery
• Onshoring of supply chains over long term
• Infrastructure bill increases industrial activity
Materials
• Benefit from economic recovery, onshoring of supply chains, infrastructure, clean energy buildout
31 Source: FactsetWhat Would We Avoid? 10-Year Treasury Yield has a large effect on startup companies due to discounting of cash flow. 32
What Areas of the Market Are We Neutral On?
Large Cap Growth-At-A-Reasonable-Price Tech (i.e. FAANGMA) Will Grow at the Rate of EPS Growth
Aspirational Earnings Aspirational Earnings
33 Source: FactsetWhat Areas of the Market Are We Neutral On?
Large Cap Growth-At-A-Reasonable-Price Tech (i.e. FAANGMA) Will Grow at the Rate of EPS Growth
Apple Shares at Fiscal Year End
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Forward P/E 12.6 14.6 11.5 21.6 32.4 30.2 28.3 26.0 25.2
E.P.S. $2.08 $2.30 $2.98 $2.97 $3.28 $5.61 $5.74 $6.24 $6.45
E.P.S. Growth Rate 10.58% 29.57% -0.34% 10.44% 71.04% 2.32% 8.71% 3.37%
3-Year Compound Annual Growth Rate 23.48%
5-Year Compound Annual Growth Rate 21.95%
Forward 1-Year Compound Annual Growth Rate 2.32%
Forward 3-Year Compound Annual Growth Rate 4.76%
Microsoft Shares at Fiscal Year End
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Forward P/E 17.8 20.8 24.4 26.3 33.1 33.2 32.2 28.1 23.9
E.P.S. $2.10 $2.71 $2.13 $5.06 $5.76 $8.05 $9.19 $10.55 $12.37
E.P.S. Growth Rate 29.05% -21.40% 137.56% 13.83% 39.76% 14.16% 14.80% 17.25%
3-Year Compound Annual Growth Rate 55.77%
5-Year Compound Annual Growth Rate 30.83%
Forward 1-Year Compound Annual Growth Rate 14.16%
Forward 3-Year Compound Annual Growth Rate 15.40%
34 Source: FactsetProfits & Multiples
Earnings growth is likely to be the primary driver of returns in 2022.
Breaking Down S&P 500 Annual Returns
60%
50%
40%
30%
49%
20%
28% 30%
10% 21%
9%
0% 1%
-14%
-10% -22%
-27%
-20%
-30%
-40%
2018 2019 2020 2021 2022 (estimated)
EPS Mult iples
35 Source: FactsetImportant Notes Cerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with offices in California, Colorado, Illinois, Michigan, New York, Ohio and Texas. Registration of an Investment Adviser does not imply any level of skill or training. This commentary is limited to general information about Cerity Partners’ services and its financial market outlook, which may not be suitable for everyone. The information contained herein should not be construed as personalized investment, tax or legal advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this commentary will come to pass. Investing in the financial markets involves risk, including the risk of loss of the principal amount invested; and may not be appropriate for everyone. Please note that any benchmark or financial instrument performance shown is purely for illustrative purposes and does reflect a measure of the performance of an actual portfolio. Benchmark(s) are unmanaged, and the figures for the index shown include reinvestment of all dividends and capital gain distributions and do not reflect any fees or expenses. Investors cannot invest directly in a benchmark. Any forward-looking market data is not guaranteed and is subject to change without notice based on changing market and economic conditions. Cerity Partners’ advisory fee as well as taxes, custodial costs, and underlying investment expenses reduce any performance materially. Certain information contained in this letter may constitute “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. No forward looking statements made in this presentation are a guarantee of future performance or market events. The information presented is subject to change without notice and should not be considered as an offer to sell or a solicitation of an offer to buy any security. All information is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees and services, send for our disclosure statement as set forth on Form ADV Part 2A using the contact information herein. Please read the disclosure statement carefully before you invest or send money. ©2022 Cerity Partners LLC, an SEC-registered investment adviser. All Rights Reserved. 14678470 (03/22) 36
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