Video transcript summarized below:
I recently attended Schwab's 2022 Stock Market Outlook and wanted to share 5 key takeaways that investors should pay attention to. Stick around, let's get into it.
Hello and welcome to the latest and greatest from One-Up Financial. I am your host Eric Presogna here to help you increase income, reduce taxes and invest smarter in retirement.
Of all the big banks and financial institutions I follow, I have to say Schwab is one of my personal favorites. Liz Ann Sonders is Schwab's Chief Investment Strategist and always does a great job of making complicated topics informative and digestible for investors, and telling it like it is. She led the presentation and covered a variety of topics relating to the stock market, the labor market and economy.
Here are the Top 5 Most Important Highlights From Schwab's 2022 Stock Market Outlook:
Are were entering a period of stagflation like in the 1970s? First, let's define stagflation for those who are familiar with the term but may not understand exactly what it means. Stagflation is when the economy is experiencing slowing growth, high inflation and high unemployment.
For better or for worse, our economy is much different today than it was in the 70s. Yes, we have a high rate of inflation and slowing growth, but employment is strong with the unemployment rate near all-time lows. I liked how Schwab highlighted how difficult it is to compare current economic data to the past as our emergence from the pandemic is more emblematic of a post World War economy than a recovery from an oil embargo in the 70s or a dot com bubble bursting in the early 2000s.
Pent Down Demand and Supply Chain
Concerns about the economy and rising rates: What we're starting to see now is pent "down" demand. That is, consumers completing their cycle of buying a Peloton, new furniture for their home office, a new iPad, etc. Not in all areas of the market but with some of the "stay at home" stocks that have, as is the case with Peloton, cut production due to a slowdown in demand.
Other areas of the market are continuing to experience supply chain issues which is in turn, is helping push inflation higher. And the lack of semiconductors is something the Fed won't be able to fix with a rate increase or by reducing the size of their balance sheet.
The stock market and the economy for that matter are driven by sentiment. Inflation is impacted more by psyche, As such, it will be critical to see what wording the Fed decides to use in future meetings.
What Should We Be Paying Attention To?
With what seems like an endless array of information being shoved down our throats on a daily basis, it's easy to get caught up in trying to stay current with everything that we passively dismiss what really matters.
Yes, leading indicators such as GDP growth, inflation and unemployment rates are important pieces of economic data to be monitoring. But we're also in seemingly uncharted territory as pandemics thankfully don't come around that often. As such, Schwab pointed out that in order to get a better handle on the strength of our economy, we should pay closer attention to data points such as new building permits, ISM orders, TSA volume, hotel occupancy, open tables seating, box office numbers and key fob swipes for office attendance. That is, parts of the economy that were significantly impacted by COVID-19: real estate, travel, entertainment, going to the office. Tracking data in these areas may give us all a better indication of how quickly we're getting back to "normal."
Some brief comments on the labor market. There's a bigger emphasis on "hybrid" activity in the workforce. This will likely be the new norm as we undergo a broad rethink of how we work.
Though the unemployment rate is low, the move in the labor participation rate has been anemic. This can be attributed to the "great resignation" as people resign from their jobs to pursue their passion or start a business. But as Schwab noted, they're seeing a lot of folks retiring sooner stating they've "hit their number quicker than they thought." That number may have changed given these past few weeks in the market, but that's a topic for another video.
My takeaway here is that the change we've seen in the labor market is not temporary. We will never go back to the way things were pre-2020 and that's going to effect different pockets of the market from travel to real estate to technology. So I think we all need to be cognizant of this and accept a "new normal."
The Fed and the Market
Let's start with the stimulus. The Fed has demonstrated its willingness to respond quickly to economic catastrophes by flooding the market with cash. They've learned, however that the consequences of this can be long-lasting and not, as they put it, transitory. Going forward, the Fed will likely continue to act quickly with regards to potential stimulus, though the length to which they provide support and size may be reduced given the impact this most recent trillion dollar injection has had on inflation.
Focusing more on the stock market now, a big question on advisors and clients' minds is whether or not the bubble will burst. Schwab pointed out that there isn't a broad market bubble but rather little bubbles that have burst. Some examples include the meme stocks, stay-at-home names like Peloton and Zoom, SPACs and certain areas of the crypto market.
Speaking of bubbles, some investors have compared the current market to the early 2000 dot com bubble. Excluding the little bubbles previously noted, the S&P has actually experienced a multiple contraction in 2021 whereas the 2000s saw expansion. Meaning, companies are earning more than their stock price is increasing.
National debt - people are concerned with the level of debt in this country and the potential long-term implications on our economy. Schwab pointed out that the cost of servicing our debt is still incredibly low. So our ability to finance debt may not be a major concern unless rates shoot up considerably. If anything, we may expect a slower pace of economic growth (like in Japan) which we're already starting to see.
Favorite Led Zeppelin Song
Kashmir. Mine is actually The Immigrant Song.
What are your thoughts on Schwab's take on the market and economy? What's your favorite Zeppelin song? Send me a message at firstname.lastname@example.org or message me on LinkedIn to chat further.
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Thanks again, and we'll see ya in the next one.