Boom On...

Gloomy sentiment sets the stage for another boom year in which all surprises will be on the upside. The Omicron case-wave may have already crested, if South Africa is a template. Its low virulence is minimizing panic and acting as an impromptu vaccine. There will be no more draconian lockdowns, or significant consumer withdrawal from economic activity. Equity valuations, according to our ERP model, begin 2022 precisely where they began 2021. This year forward earnings upgrade momentum is well above average, but not at last year’s extraordinary pace, pointing to an above-average year for stocks, but not a repeat of last year’s stellar returns. A low bar is set for this earnings season, when sufficient surprises could reignite a new upgrade cycle. The curve is discounting Fed lift-off at the May FOMC meeting. If growth and labor market recovery continue as they have, which we expect, lift-off won’t be tightening, but only an appropriate policy adjustment. But we expect statistical inflation rates to cool, and perhaps even briefly reverse, so the FOMC might wait as an insurance policy, in which case we would expect only two hikes this year. Oil prices are key, having been a major contributor to current inflation levels; that contribution will wane, as we expect oil will be flat to lower this year. Long-term yields will drift higher, but we don’t expect a growth-damaging back-up. Democrats might continue to push Build Back Better, but we believe it is now too damaged to survive. The GOP will take back the House and likely the Senate in the midterms, ending BBB definitively. The cessation of child tax credits is not a fiscal cliff depriving the economy of consumption power, but rather the end of an economic distortion that has crippled the supply-side by incentivizing workers at the margin to withhold their labor in the face of abundant job openings.