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Investment strategy
October 3, 2021
2 mins

Looking through the market noise to 2022

October 3, 2021
2 mins
David Bailin
Chief Investment Officer and Global Head of Investments
Steven Wieting
Chief Investment Strategist & Chief Economist
SUMMARY

Data points to peak demand in “goods” fueled by stimulus and an inability of consumers to avail services like travel. But we see commodity prices falling, shipping times quickening, and the pill and vaccine combination bringing a truer end to COVID in 2022.

  • Until now, there has been no simple, oral medication to treat Covid-19. On October 1, Merck and Ridgeback Biotherapeutics announced early results of an oral antiviral that reduced the rate of hospitalizations and deaths among newly diagnosed Covid patients by about 50%. In our view, the arrival of an oral medication to treat Covid-19 is a second major step forward in the fight to end the pandemic and could make the virus “treatable”, like the flu. If affirmed, this development could have significant, positive impacts on the ability of the global economy to “return to normal”.
  • Right now, global supply chain disruptions are roiling the delivery of goods everywhere, just as the demand for goods relative to services is peaking. Yet, looking ahead, a normalization for most of the economy is likely over the coming year, especially as government stimulus wanes. Near term shipping costs are very high, but we can already see delivery times speeding up. This is a reliable sign of reduced costs to come.
  • As the economy rebalances, initial price spikes – including for services – will very likely subside. News of effective new therapeutic COVID treatments makes it more likely that this normalization will fully unfold during 2022. This seems under-appreciated by markets.
  • New bond market rate pressures – even if minuscule from a yield level perspective – and the sharp rise in US growth shares has set the equity market up for a rotation similar to the cyclical rally at the start of the year. To the extent that yields rise further, growth stock valuations will be challenged. That’s because the US growth index trades at nearly double the valuation of US value shares and international equities in general. But we suggest investors watch the realized EPS growth in certain groups closely. For key growth equity index components such as semiconductors, software and cybersecurity, EPS growth is likely to remain rapid.
  • Bond yields below 2% will not inhibit economic growth and are not a major hurdle for equity valuations. Short-term investor repositioning has caused the recent market rotation to cyclicals. We believe that this is likely to reverse as manufacturing and commodity prices peak in the coming year.
  • US equities have risen at a 23% annualized rate since COVID struck. We’d expect returns to retreat to the high single digits in the coming year, with short-term corrections along the way.
  • We do not expect another “everything rally” as we saw in the rebound from the 2020 low, leaving “rotation” and inconsistent sector performance to play out.
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