Tuesday, January 18, 2022
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A strong foundation for a vibrant cycle in ‘22

🕐 6 min read

Economic forecast from wealth managers show more potent economic growth in the 2020s than the 2010s

David Nolet

The global crisis has had a marked effect leading to shifted policymaker priorities, solidified household and corporate balance sheets and accelerated innovation. 2021 provided some clarity—economies proved resilient, markets were resurgent. And while there are certainly risks to be managed including inflation, labor shortages and a persistent global pandemic, we are optimistic and see a strong foundation for a vibrant cycle ahead. All things considered, this should set the table for more potent economic growth in the 2020s than we saw in the 2010s.

David Nolet Photo by Neetish Basnet

Shifting policymaker priorities with infrastructure and other projects now in focus

Now that the emergency is over with fiscal stimulus likely past its peak, the focus is on longer-term spending proposals on infrastructure and other projects. These plans are set to allocate trillions of dollars in infrastructure spending, high-speed internet systems and clean energy, and fund other priorities such as childcare and healthcare.

The current US legislation agenda currently outlines spending on physical infrastructure, research and development in technology (e.g., robotics, artificial intelligence and biotechnology), subsidize domestic semiconductor manufacturing and support development of clean technology. Other measures addressing education, childcare, and supply chains could deliver some positive long-term economic benefits.

Higher taxes will pay for some of the costs of these policies. Personal tax rates for higher-income families are likely to rise, making asset structuring and planning more critical. While the statutory corporate tax rate may stay the same, changes to global intangible income taxes and a corporate minimum tax will likely be a drag on earnings. However, corporate tax changes will probably not be enough to offset the earnings growth we expect from sales and operating leverage. We also do not expect the higher tax rates, currently proposed, to curtail business investment.

Wages up, household spending increases and corporations benefit

The aggressive policy response to the pandemic prevented a self-reinforcing downturn, and supported household and corporate balance sheets. Looking ahead, we see continued financial strength for both. Household net worth is at all-time highs, debt service payments are at all-time lows, and consumer sentiment has room to recover.

Jobs are plentiful, and employers are paying a premium to attract workers. The U.S. quits rate is at the highest level in the series’ history back to 2000, suggesting robust demand for labor. Broadly, wages are up 4–5% year-over-year, the strongest pace since the mid-2000s, and the highest share of small businesses on record are planning on raising compensation. Importantly, wages are growing the fastest at the lowest levels of income.

This is evident across many sectors locally here in Fort Worth, particularly in service industries like dining, retail, and hospitality where entry level positions continue to remain vacant.  As I speak to many local business owners, they say this has forced a significant premium on entry level wages- which has impacted profit margins and also forced end prices up for the local Fort Worth consumer.

The Healthcare sector has also seen a huge impact as positions remain vacant across the spectrum, from entry level positions to nurses.  Many of our local hospitals have used agency employees to fill positions with qualified staff- an approach that is significantly more costly.  This has put pressure on an already difficult situation that our local hospitals face with a growing population, caring for those in critical need while also managing the rise and fall of in the number COVID related patients.

Sectors including housing and autos may be set to lead in the current cycle. Home prices have risen, but low mortgage rates and income growth are keeping housing affordable. This is evident by the migration of people from states like New York and California to Texas and Florida. In speaking with many local Fort Worth realtors over the past year, I continue to hear the consistent theme that many homes are selling before hitting the market and for ones that do, they often sell above asking price. 

Furthermore, the shift to more flexible work has allowed people to move from cities and nearby suburbs to relatively less expensive suburbs – a trend we expect to continue.  There has been significant development all around Fort Worth, including in Burleson, Aledo, Weatherford, Colleyville, Keller and additional growth in and around Arlington.

On the corporate side, earnings and margins are at all-time highs, investment grade credit spreads are at all-time lows and demand is strong. In the developed world, the financial sector seems solid and willing to lend. S&P 500 companies have translated approximately 6% global economic growth and 15% sales growth into 45% earnings growth in 2021. That operating leverage surprised investors and led to approximately 25% price appreciation for the index.

Continued innovations in healthcare and auto

Healthcare innovation delivered powerful vaccines with astonishing speed. Policymakers and corporations remain committed to investment in climate change mitigation. We think these trends will continue to drive research and development, investment and value creation.

One data point is telling: Electric vehicles have at least 4x the semiconductor content of traditional, internal combustion engine ones.

As healthcare innovation is set to accelerate, we think the industry is likely to become more personalized, more focused on preventative care and more digital. Wearables, telemedicine and gene editing are other notable areas of investment opportunity.

Examining the relationship of economies and markets, we see compelling returns for goal-aligned portfolios. Before considering changes to your portfolio, we recommend first taking stock of your current position and confirm what your portfolio needs to do for you, your family and your community. As you consider our outlook on the New Year, remember that your own portfolio positioning should reflect a goals-based plan, investing framework and risk tolerance.

David Nolet is a Managing Director and the Fort Worth, TX Market Manager at J.P. Morgan Private Bank. David oversees a team of bankers, investors, wealth strategists and financial specialists that deliver guidance across investing, philanthropy, family office management, credit, fiduciary services, advisory services and more. To learn more about David Nolet and the Private Bank in Texas, visit www.privatebank.jpmorgan.com/fort-worth.

CITATIONS AND DISCLOSURES

All market and economic data as of April 2021 and sourced from Bloomberg and FactSet unless otherwise stated. Information is also featured on J.P. Morgan’s Ideas & Insights. We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice

RISK CONSIDERATIONS

Past performance is not indicative of future results. You may not invest directly in an index. The prices and rates of return are indicative, as they may vary over time based on market conditions. Additional risk considerations exist for all strategies. The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service. Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.

 “J.P. Morgan Private Bank” is a brand name for private banking business conducted by JPMorgan Chase & Co. and its subsidiaries worldwide. JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. JPMCB and JPMS are affiliated companies under the common control of JPMorgan Chase & Co

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