2022 U.S. Market Outlook: Under Pressure

Bear with us as (no pun intended) you read this longer-than-usual outlook!

The 2020 COVID recession was sharp, but short at only two months; while the rebound in activity has also been sharp, but uneven across economic metrics. Overall gross domestic product (GDP) moved from the recovery phase to the expansion phase as of the second quarter of 2021. As highlighted in the visual below, the question heading into 2022 is where we go from here—especially due to the stark reminder on this year’s “Bleak Friday” that the pandemic is nowhere near behind us.

Oh c’mon omicron!

How many times over the past 18 months have we started to breathe signs of relief that the pandemic was rounding the corner to becoming endemic, only to be hit by second or third waves, the delta variant and now the omicron variant?

Based on initial World Health Organization (WHO) findings, the omicron variant spreads more quickly, can cause more serious cases, and/or may decrease the effectiveness of vaccines and treatments. What we’ve learned from the delta variant is that it’s difficult to arrest the spread. What the entire world has learned throughout the pandemic, however, is that it’s the restrictions and/or lockdowns imposed that cause the most economic damage; while countries have vastly different reaction functions.

The rub at this stage in the global recovery is that the economic, supply chain, and inflation backdrop is significantly changed relative to prior waves/variants. The pandemic has exposed instability in complex global supply chains; possibly ushering in a coming secular environment of pervasive supply shocks, vs. the demand shocks that were more commonplace for much of the past two decades. Expect more talk about companies switching from just-in-time inventory management to just-in-case. We all have to wait to see if the effects of omicron are significant; and whether they do more damage to demand, or exacerbate supply chain problems.

What say you LEI?

Without yet possessing more detailed analysis of the threat of omicron, we’re left with more traditional ways to judge the economic landscape for the coming year. As shown below, the Leading Economic Index (LEI), shows that the U.S. economy remains strong and well above the pre-pandemic high. The average span between LEI highs historically, and recession (gray bars) starts has been 12 months. While there is no sign of an imminent peak, a more serious economic threat wrought by omicron, or any number of other threats, could put a dent in leading indicators.

LEI Not Yet Looking Back

Source: Charles Schwab, Bloomberg, The Conference Board, as of 10/31/2021.