2022 - Finally a Market Rotation?

The major theme the past several months has been inflation.  How high will it go?  How long will it last and will high inflation force the Fed to tip its hand earlier than they would like?  If the Fed is more aggressive in taking away the punch bowl than is currently expected, it will certainly create interesting dynamics in the stock market where growth stocks have yet reigned supreme.

Another major theme is the economy, which has been running hot over the past year.  The unemployment rate is near historical lows as businesses scurry to find workers.  A combination of a large percentage of the workforce retiring, Covid-19 fears and the high cost of daycare will most likely keep the labor market tight for the foreseeable future.  This has caused wages to increase, but it is unlikely that labor will start to get the upper hand over management unless we see a sharp spike in union participation.  Productivity has been increasing, which has helped to offset part of the labor problem as companies are able to produce more with fewer workers.  Increasing productivity will be key going forward as companies continue to struggle to find workers.

Photos of ships at sea waiting to unload cargo continue to spark conversations around supply chain management.  New cars sit idle in factories waiting for chips, inventory sits at the ports as America finds itself suddenly without enough truckers to move goods inland to distribution centers.  The narrative has been that this has been mostly a supply issue, but we believe spiking demand has been just as much to blame.  Higher prices will ultimately reduce demand, which will lower prices around the same time supply comes back online.  This could be a recipe for moderating inflation over the course of 2022.

With interest rates near all-time lows growth stocks were the only game in town for the past several years (in addition to more speculative fair as well, including Crypto currencies, Meme stocks and NFT’s).  If interest rates start to move up, we believe this could provide head winds for growth stocks and speculative investments and we may finally see a rotation into value stocks, small cap stocks and international stocks.  The market always reverts to the mean and 2022 may finally be when the great rotation out of growth stocks begins.  Or it won’t.  Only time will tell, which is why we remain balanced and diversified and focused on the long-term.

The Bond&Devick Team