Chips and a Dip, Anger and Progress, During a Mid-Cycle Market
Are we coming to the end of an economic cycle? Not even close. Fear over COVID is waning and consumer demand for everything from cars to clothing is strong. Word of a coming pill therapy is giving hope to some seventy million Americans who do not want to be vaccinated. Herd immunity or at least a transition toward normalcy is now possible.
Wage-rate inflation is a potential problem. Earnings for the S&P 500 are expected to hit $225 in 2022. Yet, a new survey points to an angry American citizenry. Some three out of four Americans are growing very angry at, generally, the way things are going. Sixty-nine percent of Americans surveyed say things are going from pretty bad to very bad. Will this bitterness lead to a market meltdown?
Anger over the top four problems in America; coronavirus, economics, government leadership, and immigration, may carry over into a lower price-to-earnings ratio. Fear and anger tend to slow investor enthusiasm. Yet, even if price-to-earnings ratios fall from the current 34.7 S&P 500 multiple into the mid-20s, this market has plenty of support.
To illustrate, if S&P 500 earnings, now expected to hit $225 in 2022, do materialize, a lower multiple of 25 (down from 34.7) could produce a 5625 S&P 500 before the end of 2022. Nevertheless, a good old correction would provide exciting upside for the minions holding cash and waiting for a better buy-in price.
Meanwhile, supply-chain disruptions are not going away soon. Auto makers and the legion of companies supporting the auto industry are being held back for want of chips. These supply-chain problems are limiting fourth-quarter GDP expectations from 6% to 3%, setting the stage for a dip now and a much stronger 2022.
Expect a short-term pickup in market volatility, though long-term investors should remain confident. Marketedge.com, which tracks the cyclicality of markets for technical investors, predicts weakness in the fourth quarter, followed by bullishness extending over the next two plus years. May it be so.
A global synchronous growth cycle looks possible for 2022. Many analysts think we are now in the early to middle stages of this economic cycle. Because mid-cycle markets tend to include wide swings investors will be tested at some point. This is the period when weak holders of stocks will be tested as to how much faith they have in the equity risk premium theory.
If mid-cycle thinking is correct, thereafter, a move into the last phase of this market could commence after the forthcoming spate of market weakness. It’s just a matter of time. In fact, short-term technical signals point to a pullback in the next 100 days.
No one really knows what the catalyst will be to cause a much larger correction than we’ve seen in 2021. It could be a combination of things, a perfect storm if you will. Fed rate-hike talk is upon us., We may soon get Congressional confirmation of massive tax hikes. Political infighting may ensue. Mid-term elections are already coming into focus as voting begins in November 2022.
Meanwhile, international markets are concerned about the slowing Chinese economy. So, several perfect-storm possibilities could develop. I currently see the most plausible negative scenarios developing after 2022. We shall see.
For the immediate future, the biggest economic problems facing America are taxation and stymied manufacturing. Tax increases have the potential to be a drag on the economic recovery into 2022 and beyond. Will any of these issues bring about a correction soon? Just now the rhyme going around is Chips and a Dip.
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
McKinsey & Company
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