A solid basis for a dynamic cycle in ’22
The economic forecasts of wealth managers show more powerful economic growth in the 2020s than in the 2010s
The global crisis has had a marked effect, causing changes in the priorities of policymakers, the consolidated balance sheets of households and businesses and accelerated innovation. 2021 brought some clarity: economies have shown resilience, markets have resurfaced. And while there are certainly risks to be managed, including inflation, labor shortages and a lingering global pandemic, we are optimistic and see a solid foundation for a dynamic cycle ahead. All things considered, this should set the stage for more powerful economic growth in the 2020s than we saw in the 2010s.
Changing the priorities of policymakers with infrastructure and other projects now at the center of attention
Now that the emergency is over and fiscal stimulus is likely past its peak, the focus is on longer-term spending proposals on infrastructure and other projects. These plans include allocating billions of dollars in spending on infrastructure, high-speed Internet systems and clean energy, and funding other priorities such as child care and health care.
The current U.S. legislative agenda currently outlines spending on physical infrastructure, research and development in technology (for example, robotics, artificial intelligence, and biotechnology), subsidize domestic semiconductor manufacturing, and support the development of clean technologies. Other measures in education, child care and supply chains could offer positive long-term economic benefits.
Higher taxes will pay part of the costs of these policies. Personal tax rates for high-income families are likely to rise, making asset structuring and planning more critical. While the statutory corporate tax rate may remain the same, changes to global intangible income taxes and a minimum corporate tax will likely weigh on profits. However, the corporate tax changes are unlikely to be enough to offset the earnings growth we expect from sales and operating leverage. We also don’t expect the higher tax rates currently being proposed to reduce business investment.
Wages Rise, Household Spending Rise, and Businesses Profit
The aggressive policy response to the pandemic prevented a self-reinforcing slowdown and supported household and business balance sheets. Going forward, we expect continued financial strength for both. Household net worth is at an all-time high, debt service payments are at an all-time low and consumer confidence has room to recover.
Jobs are plentiful and employers pay a premium to attract workers. The quit rate in the United States is at the highest level in series history since 2000, suggesting strong demand for labor. Overall, wages have increased 4-5% year-on-year, the fastest pace since the mid-2000s, and the highest share of small businesses on record plans to increase wages. It is important to note that wages increase fastest at lower income levels.
This is evident in many industries locally here in Fort Worth, particularly in service industries like the restaurant, retail and hospitality where entry level positions remain vacant. When I talk to many local business owners they say this forced a significant premium on entry wages which impacted profit margins and also increased end prices for the local consumer. of Fort Worth.
The healthcare sector has also seen a huge impact, as positions remain vacant in everything from entry-level positions to nurses. Many of our local hospitals have used agency workers to fill positions with qualified staff, an approach that is considerably more expensive. This has put pressure on an already difficult situation our local hospitals face with a growing population, caring for those who need it most while managing the rise and fall in the number of COVID-related patients.
Sectors such as housing and autos could be leading the current cycle. Home prices have risen, but low mortgage rates and income growth keep housing affordable. This is evident by the migration of people from states like New York and California to Texas and Florida. Speaking with many local Fort Worth realtors over the past year or so, I continue to hear the consistent theme that many homes sell before they hit the market and for those that do, they sell. often above the asking price.
In addition, the shift to more flexible working has allowed people to move from nearby towns and suburbs to relatively cheaper suburbs – a trend that is expected to continue. There has been significant development all around Fort Worth including Burleson, Aledo, Weatherford, Colleyville, Keller and further growth in and around Arlington.
On the corporate side, profits and margins are at record highs, credit quality spreads are at their lowest and demand is strong. In the developed world, the financial sector appears strong and ready to lend. S&P 500 companies translated global economic growth of around 6% and sales growth of 15% into earnings growth of 45% in 2021. This operating leverage surprised investors and led to appreciation of the price of about 25% for the index.
Continuous innovations in healthcare and automotive
Innovation in healthcare has delivered powerful vaccines at an astonishing rate. Policymakers and businesses remain committed to investing in climate change mitigation. We believe these trends will continue to drive research and development, investment and value creation.
One thing is telling: electric vehicles have at least 4 times more semiconductors than those with traditional internal combustion engines.
As innovation in healthcare is about to accelerate, we believe the industry is likely to become more personalized, more preventative care-oriented, and more digital. Wearable devices, telemedicine, and gene editing are other notable areas of investment opportunity.
By examining the relationship between economies and markets, we see attractive returns for goal-aligned portfolios. Before considering any changes to your portfolio, we recommend that you first take stock of your current location and confirm what your portfolio needs to do for you, your family, and your community. When you consider our outlook for the new year, remember that your own portfolio positioning should reflect a plan based on objectives, an investment framework and a tolerance for risk.
David Nolet is Managing Director and Market Director for Fort Worth, TX at JP Morgan Private Bank. David oversees a team of bankers, investors, wealth strategists and financial specialists who provide advice on investment, philanthropy, family office management, credit, trust services, advisory services and more again. To learn more about David Nolet and private banking in Texas, visit www.privatebank.jpmorgan.com/fort-worth.
QUOTES AND DISCLOSURES
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