We would also push back against the narrative that once supply chains resolve themselves that an economic boom is poised to ensue.
The market is anticipatory and lagged data is far less important than how policy makers respond to this data. This is known as the reaction function. There are three big reaction functions taking place currently that will shape how markets perform in 2022.
The first reaction function is that of government-to-virus headlines. As we continue to go down the Greek alphabet there continues to be no deviation in the virus reaction function.
The latest mutation once again showed many large global economies default to lockdowns and restrictions whenever there are increasing cases or the threat of them. Since the virus can be spread through animals its eradication is all but impossible.
Therefore, more variations in 2022 with ensuing lockdowns pushes the global growth curve downward.
The second reaction function is fiscal stimulus, both domestically and globally. The United States is facing a significant fiscal cliff with government spending dropping significantly.
Estimates are about 2.5% of domestic GDP will come off in 2022 versus 2021 just due to less fiscal spending. China is facing a severe slowdown amid a property bust. They recently enacted some modest easing measures to help mitigate the pain.
It remains a question whether they will provide enough to offset their own shortfall, but there is no indication China is ready to inflate the global economy as they did after the Global Financial Crisis with huge amounts of stimulus.
Lastly, and most importantly, we have the Fed’s reaction function.
The latest plot twist has Federal Open Market Committee (FOMC) Chair Jerome Powell pivoting to a hawkish rhetoric when speaking in front of the Senate Banking Committee. This helped set markets into a bit of a sell-off with the speculative equities coming under heavy selling pressure.
These are the types of investments that tend go down 50-80% when easy money dries up. This pivot is likely driven by politics, as blame for inflation must fall somewhere, and it is standard for elected officials to put such blame anywhere but upon themselves.