Outlook 2022 Executive Summary

Outlook 2022 Executive Summary

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PASSING THE BATON

Our resurgent economy grew at over a 6% pace in the first half of the year and is on track

for over 5% growth for the year when 2021 draws to a close. The current economic recovery,

which started in May 2020, has benefited from widespread vaccine availability and

additional fiscal stimulus. While the economy continues to move forward, we’re still

feeling the aftershocks of the COVID-19 Delta variant, whether through elevated inflation,

supply chain bottlenecks, or an imbalanced labor market. But 2021 also saw positives

beyond economic growth, with schools opening their doors and extended family gathering

around many Thanksgiving tables, activities that were far less common in 2020. At the

same time, the S&P 500 Index continued to advance as corporate America faced this

generational challenge with resiliency and saw earnings growth that surprised even the

most optimistic pundits.

The recovery has been a testament to our ability to manipulate our world. Scientists

developed several vaccines extraordinarily quickly. Central banks and policymakers found

ways to insert themselves into the complex network of economic relationships to help

bridge the worst of the economic crisis. But the same scale that multiplies our control of

the world can also multiply potential mistakes and make robust, complex systems more

fragile. We’ve had a hand up that has helped us through a period of unique economic

challenges. In 2022, the economy may be ready for a handoff, back to a greater emphasis

on the individual choices of households and businesses. How smoothly that handoff is

executed may determine the course of the recovery.

On a smaller scale, for many of us, those individual relationships that always sustain us

have been that much more vital over the last two years. We managed to stay connected

with friends and family. Found new ways to work together with our colleagues. And relied on

our relationships with skilled professionals to navigate difficult decisions. Sound financial

advice in particular has helped guide many through this period of uncertainty. LPL Research’s

Outlook 2022: Passing the Baton is here to provide insight and analysis for the next set of

challenges the economy and markets may face.

December 2021 Client Letter

December 2, 2021

Dear Valued Investor:

We hope everyone enjoyed the Thanksgiving holiday with family and friends. While life has been challenging during the pandemic, we have a lot to be thankful for. At this time, we are especially grateful for COVID-19 vaccines and treatments that have helped us make so much progress tackling the pandemic. Unfortunately, the emergence of the new COVID-19 Omicron variant and the related market selloff in the days after Thanksgiving offered an unpleasant reminder that the pandemic is not over. The economy and financial markets remain somewhat reliant on the medical community and research developments.

Predicting the impact of the new variant is difficult, if not impossible, at this point. But there are logical reasons to expect limited economic impact, such as high vaccination rates, advances in treatments to reduce instances of severe disease, and various containment measures to limit spread (masks, distancing, etc.). Lockdowns are extremely unpopular, so we’re probably not headed there again, but we have a playbook that we can be reasonably confident will work.

However, key questions remain unanswered. Will existing vaccines be less effective against Omicron? Will symptoms be more severe than prior variants? Is this latest variant more transmissible than prior variants? So, while we think the drag on the economy will be modest, we simply won’t know for sure until we get more data over the next couple of weeks. Markets don’t like uncertainty, but we’ll have an extra helping of it on our plates along with Thanksgiving leftovers for a little bit.

Omicron does not change the fact that the U.S. economy is showing some strong momentum. A solid 1.7% increase in retail sales in October and a good start to the holiday shopping season point to strong consumer spending in the fourth quarter. The National Retail Federation sees holiday sales potentially increasing by 10% this year compared with 2020. Meanwhile, new filings for jobless claims for the week ending November 19 fell to a 50-year low, an impressive number even considering distortions from seasonal adjustments.

Businesses are doing their part to support financial markets in a tough operating environment. Profits from S&P 500 Index companies rose nearly 40% year over year in the third quarter and are expected to rise another 20% in the fourth quarter (source: FactSet) despite persistent supply chain disruptions, shortages of labor and materials, and related cost pressures. Net profit margins for S&P 500 companies in the third quarter remained near record-high second quarter levels, a remarkable feat given the circumstances. Finally, manufacturing surveys point to solid demand while offering signs that supply chain disruptions, and possibly inflation pressures, may be at or near a peak.

The path back to normal has been bumpier than anticipated, but we’ll get there. Omicron probably won’t derail the economic recovery or cause a stock market correction, but we just can’t know for sure. At least not yet. Stay tuned.

Here’s hoping you have a wonderful and healthy holiday season. Please contact me with questions.

Sincerely,

Wayne Rigney


Important Information

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All data is provided as of December 1, 2021.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All index data from FactSet.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

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