In addressing the business professionals gathered for the recent market update call entitled “Reflection and the Road Ahead: Market Insights and Outlook,” People”™s United Advisors”™ Chief Investment Officer John Traynor considered the unlikely journey from Points A to B that occurred over the past 12 months.
“We were pretty enthusiastic about the potential for 2021,” he recalled, noting the euphoria surrounding the success of the Covid vaccine, the continued impact that the stimulus spending had on the pandemic-scarred economy and the optimism for emerging from Covid”™s miserable shadow.
With 2022 arriving in a matter of days, the Bridgeport-based Traynor admitted that challenges persist, particularly with the potential of a slower growth rate, although he predicted that “we’re seeing the worst of the inflation numbers right now” and prices will start to go down in the new year. But he also pointed out the challenge from wage inflation, which he believed will spur the Federal Reserve to increase its tapering.
“If you just think about the last three months, there certainly has been wage inflation wage increases,” he said. “But the work week has also increased, so we’re not only making more money, we’re also working longer. Over the last three months, if you annualize the increase in worker compensation, it came out to 11.8% ”” which, if you’re the worker, you’re very, very happy. But that’s what is causing the Fed to get a little bit nervous about what’s going on with inflation.”
Traynor did not believe the Fed would begin raising rates until the second quarter of 2022, but he theorized this would come with the simultaneous delivery of new stimulus spending from Capitol Hill and the White House.
One economic trend that Traynor did not celebrate was the declining participation of older workers in the labor force.
“The Economist estimated there have been more than 2.4 million excess retirements, meaning those above and beyond what normally would have been expected, absent that pandemic,” he said, acknowledging that “these excess retirees were likely older people more vulnerable to the coronavirus, but they also included people who chose to retire early because of the rising values of their retirement investments and their homes.
“Some of these excess retirees, if we could call them, that may return to the labor force if the public health situation improves significantly, but it is more likely that they will not and that the labor force will continue to be adversely impacted by a higher rate of early retirements.”
Albert Brenner, director of investment and economic research at People”™s United Advisors, joined the market call to highlight a 2021 stock market where a new wave of retail investors unexpectedly flexed their muscles and gave outsized vibrancy to so-called meme stocks and riskier assets, most notably cryptocurrency. Brenner pointed out that he chose not to follow those trends.
“And the happy news is we’ve done very well for our clients over the past two years,” he said. “As we’ve resisted the temptation to chase either hot stocks or hot asset classes, we came into 2020 with a neutral allocation to stocks, meaning no more nor less than the middle of the road allocation for a particular investor objective.
“At the same time, we’ve steered a neutral course on growth versus value stocks, both in our portfolio construction and within the stocks in our core large cap portfolios. As the market has vacillated this year between high growth and slow growth outlooks, value stocks and growth stocks have gone in and out of favor with investors. And rather than trying to capture these week-to-week and sometimes day-to-day swings, we stayed focused on our basic disciplines and added value with each of our three proprietary stock models this year, producing above benchmark returns.”
Looking into 2022, Brenner said his firm was continuing with an overweight allocation to equities.
“For all the uncertainties regarding economic growth, and equity valuations, we remain convinced that equities will do better than bonds next year,” he said. “We’re also maintaining our overweight allocation to domestic equities. We don’t see any catalysts that could boost international equity returns over U.S. returns, even though relative valuation levels appear to favor international stocks.
“And finally,” Brenner added, “we are continuing with our neutral view on growth and value. That may change as the economy evolves throughout 2022, but for now we don’t see investors being rewarded by a tilt in portfolios one way or the other.”
