We will not mince any words here: it has been a rather flatfooted start to 2022. This morning’s jobs report proved as much. The Washington, DC-based Bureau of Labor Statistics reported jobs increased by a mere 199,000 in December. US government payrolls shrank by 12,000. Meanwhile, private American employers added 211,000 jobs. On the bright side BLS suggests hiring figures from the prior two months were understated by 141,000. This brings the 2021 average monthly payroll gain to 537,000—not bad. December wages jumped 0.6% MoM and unemployment declined to 3.9%. Similarly, U6 declined to 7.3% with labor force participation holding steady at 61.9%. The average American workweek ticked down slightly to 34.7 hours in December. Of course, we need to bear in mind there is a tinge of omicron in these numbers, and the Fed’s attitude toward policy tightening is likely little changed at this stage.
Other December economic datapoints indicate that the US economy concluded 2021 on solid if not uninspiring footing. American manufacturing and services held up nicely even as omicron cases surged during the holiday period—never count out that US consumer, especially this time of year (personal spending jumped 0.6% MoM). Meanwhile, ISM’s nonmanufacturing PMI registered a reading of 69.1 to close out the year, which is the highest reading on record! However, things seem to be cooling off a bit on the manufacturing front. ISM’s corresponding US manufacturing gauge came in at 61.1, which is a tad better than pre-pandemic levels. As an aside, we do expect to see continued resilience in the US dollar throughout 2022. This could become a headwind for American manufacturers in the event that rate differentials propel the US dollar further than expected, so we will be keeping a close eye on fluctuations in short-term rates and any adjustments to the language coming out of the Fed and other central banks. It’s all about the differentials in the currency complex!
In other news we are still waiting on some capex… Construction spending ticked up marginally last month by 0.2%, and with President Biden’s economic agenda snarled in Congress we are uncertain as to when we will see a meaningful uptick in outlays for long-term projects. On a positive note core durable goods orders held the line rising 0.8% MoM even as inflation ramped up pressure at both the producer and consumer level again. December data indicate that core CPI rose 0.5% and core PPI surged 0.7% on a monthly basis. If there is a silver lining to the near-term inflation picture, it is that producers have been unable to pass through the full burden of price increases to American consumers—this is relatively benign insofar as the US is very much a consumer-based economy. Regardless, we will certainly be monitoring developments on inflation throughout 2022. Of course, earnings season should give us a clearer picture from the C-suite in the coming days and weeks.
Speaking of earnings, ‘tis the season! We will be hearing from the executives of the world’s largest corporations as they roll out the results of this past quarter and provide guidance on what to expect in 2022. This will surely be an interesting and exciting year for financial markets! Candidly, we expect a “sloppy” market for US and global equities at least through the end of the first quarter. As far as the rest of 2022 goes, revenue growth will likely moderate, but financial conditions should remain conducive enough to bolster bottom line growth. Our current expectations for the S&P 500 include annualized earnings growth of ~8% at the operating level. We also need to make allowances for a more hawkish posture from the Federal Reserve, which at this point calls for three interest rates hikes in the upcoming year (ambitious?), and a relatively stable if not strong US dollar. The latter will have a greater influence on our earnings expectations; the former will most directly impact our valuation metrics. So, while our near-term fair value estimate for the S&P remains unchanged at 4800, we do see a reasonable case for 5350 in 2022 and with that we wish you a very happy New Year!
Market Outlook: Neutral USD, Neutral Duration, Neutral Equities
News Release: Bureau of Labor Statistics (The Employment Situation- December 2021)