Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Q4 2021 hedge fund letters, conferences and more
“The more extended the advance, and the higher valuations become, the more stable and promising the investment can appear to be, when judged through the rearview mirror.” John Hussman
The first part of my 2022 outlook looks through the front windshield and contrasts 2021’s tailwinds to 2022’s growing headwinds. While no one knows what 2022 holds in store for investors, my concern is that it should not foster the same optimism as 2021. The economic and financial environments are shifting rapidly. Relying on the recent past, as Hussman warns, may be hazardous to your wealth.
It’s All About Growth
Before looking forward, it’s worth explaining how economists assess economic activity.
Most economic activity is measured in percentage growth terms and not nominal terms. To stress the importance of this nuance, consider the following:
If the government gives consumers $1 trillion to spend, it will boost GDP by at least $1 trillion. In our example, the stimulus will boost GDP to $21 trillion from $20 trillion, equating to 5% growth. Without government stimulus and excluding any new economic activity, GDP will retreat to $20 trillion in the following year. As a result, GDP will decline by 5%. While nothing changed with the economy, the 5% decline will be considered a recession. To avoid zero or declining economic growth, again assuming no other activity, the government will need to provide at least $1.01 trillion of stimulus.
As I show above, stimulus boosts economic activity. However, it detracts from economic growth rates unless it grows each year. This fact will become important in my 2022 outlook as the government will not likely replicate the massive amount of stimulus doled out over the prior two years. Can the economy make up for it?
COVID Tailwinds
In hindsight, the rearview mirror showing from March 2020 to the present paints an unusual picture. What started so poorly ended up being one of the greatest periods for investors. The S&P 500 total return since the March 2020 lows is +115%.
In March 2020, the sky was falling, and investors aggressively sold stocks. It turns out buying stocks in the face of such a unique calamity was the right thing to do. The justification was not a coming cure or vaccine for COVID or an imminent return to normal, but the government with their fiscal guns blazing.
Read the full article here by Michael Lebowitz, Advisor Perspectives
