Making Money When They Stop Making Money

At the end of 2019, had we been told that a two-year pandemic was about to begin, we would have found it impossible to predict the set of returns that followed in subsequent years. Since the start of 2020, through 2021-to-date (through December 10), the S&P 500 has gained almost 50%, the Bloomberg-Barclays Long Treasury Index has gained 14%, while gold and oil have each gained roughly 18%. A rising tide of liquidity has floated many boats, raising the question of how investors should navigate a world in which liquidity is no longer rising, or at least, is not rising anywhere nearly as quickly. Nonetheless, any policy normalization in 2022 will almost certainly be reacting to a second consecutive year of huge nominal GDP growth (see Figure 1), making the composition of that growth, namely the quantities and prices components, of critical importance for investors. In this commentary we outline 11 themes (and some prognostications) that we think will drive investment returns in 2022.

Figure 1: Expectations for nominal growth in 2022 are historically high

1) Growth may surprise to the upside, underpinned by a labor market that should take unemployment rates to “eye-popping” low levels

The supply of labor will determine the evolution of the labor market, rather than demand. Conservatively, assuming 200k-400k monthly nonfarm payroll gains over the course of 2022, wage growth that is in-line with that of the last 12 months, and no change in hours worked, we would witness an aggregate income gain for the labor force of about 7% over the course of 2022. And remarkably, in that event aggregate income would have grown by more than 14% since the pandemic began in February 2020. Yet this also means that about 3 million people will need to be added to the labor force – an effective “passing of the income baton” from fiscal stimulus to wages, a process that is well underway. While the numbers are volatile, non-seasonally adjusted payroll data suggests that well over 700k employees are being added to payrolls each month (on average, over the last 10 months, as displayed in Figure 2), including in November (much greater than the more widely followed seasonally adjusted number).

Figure 2: Non-Seasonally Adjusted (NSA) Non-Farm Payrolls are running in excess of 700k/month