Ep.141 – Andrew Opdyke – 2022 and the Economy
How will the economy be impacted now that 2022 is here? Covid rates are finally going down and the pandemic is slowly becoming a thing of the past, but how will that impact our economy?
The US is continuing to reopen and even though we’re still experiencing the aftermath of the pandemic- the inflation rates and the markets are getting back to how they’ve historically been.
In this episode of the Secure Your Retirement podcast, we have Andrew Opdyke, a Certified Financial Advisor, Economist at First Trust Advisor. He explains how the 2022 midterm elections are likely going to affect our economy in terms of tax hikes and the stimulus.
In this episode, find out:
- The positives witnessed in 2021 – the Covid and market situation and what to expect in 2022.
- The expected supply chain progressiveness, which might move the inflation rate later in the year.
- How policy changes and the political climate will likely impact our economy in 2022.
- Why the market is getting tougher and how that will affect the S and P companies.
- Expect the markets to look more like they have historically and not at the same pace they have over the last 2-3 years.
- What the feds need to do to avoid significant market volatility in 2022 and possibly 2023.
- Andrew’s surprise of 2021 on how well companies performed and technological progress.
- Why he’s excited to get back to fundamentals in 2022, and a possible industrial breakthrough.
- “Politics is going to play a big role this year on whether or not we get tax hikes and additional stimulus coming into the system.”– Andrew Opdyke
- “We should reset expectations for 2022 and expect the markets to look more like they have historically, high single digits into low double digits for market growth.”– Andrew Opdyke
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Here’s the Full Transcript:
|Radon Stancil:||Welcome everyone to our podcast, Secure Your Retirement. Today is exciting for us because we get to have a new… We’re in a new year and we get to have a revisit from our podcast economist, Andrew Opdyke. Let me just say this before we go any further, Andrew, thank you again. We certainly do appreciate you hopping on these podcasts with us and giving us your insight, your updates. Thank you so much for coming on.|
|Andrew Opdyke:||Oh, absolutely. I love our conversations.|
|Radon Stancil:||Great. Here we are. We’re at the beginning of 2022. Obviously we survived 2020 and 2021. Actually I would say we didn’t survive. We actually thrived. I mean, the markets did great. Before we go into where we think things are going, can you maybe do us a nice overview or recap of the 2021 market, what it looked like, maybe where we saw problems, maybe where we had concerns, how it ended up?|
|Andrew Opdyke:||Yeah. I mean, 2021 was a very interesting year, particularly coming off of 2020, right? COVID starts. Everything kind of went off the rails. And then we started the recovery in 2020. There was major questions going to 2021. We started to have the vaccines. Those became initially available in December of 2020. I think a lot of people were looking at 2021 and said, “This is a recovery year. This is where we kind of put COVID behind us. This is where we get back.”|
|We’re on that rebuilding process, trying to make up for that lost time, that lost activity that we saw in 2020. Now, 2021 had its own problems. Here we stand the beginning of 2022, we’re still talking about COVID. Now we’ve got Omicron. And before that, we had Delta, and we do have massive vaccination that’s taken place across the United States, across the world. There are some positive signs that cases that we’ve seen have been less deadly. They resulted in fewer hospitalizations, but it certainly brought volatility to the markets.|
|Now, that said, the overwhelming factor last year from a market standpoint was what we saw with profits, right? We saw strong profit growth from S&P 500 companies. We saw it from some of the smaller and midcap companies started to see some performance. It was a year where the fundamentals kind of started to take back over, but they didn’t completely shut out that volatility from emotion, right? We had a positive year, up double digits, strong double digits, for really the third year in a row.|
|Now, as we get to the end of 2021, as we move here into 2022, I think we’re seeing a bit of a wind shift in terms of both the economic and the market fundamentals. I think we are largely getting back to those fundamentals. COVID is still here, but it’s less of an impacting factor. The stimulus is behind us. I think we’ve picked the low hanging fruit, getting back to activity after the shutdowns.|
|And now the year ahead of us is very much going to be focused on can we bring back the jobs, can we get the supply chains back in order. I think we’re going to continue to grow, but the pace of that is going to start to moderate.|
|Murs Tariq:||Yeah, Andrew, thanks for that summary on 2021. And now, like Radon said, here we sit in 2022 and it’s kind of like, well, what is there to expect? What can possibly happen that we have not already experienced? Last year was full of a bunch of headlines, a bunch of weird news, a bunch of bad news, a bunch of scary stuff. But ultimately, the economy did pretty well. Now here we sit at the beginning of the year. Let’s go ahead and tackle… Because you just mentioned supply chain.|
|I think supply chain, we never had any type of interruption like this in our lifetimes as far as the supply chain goes. We didn’t really know how long is it going to take to recover and how reliant we are on supply chains to keep the world moving. Where are we at now on that as far as the numbers that you’re seeing with supply chains? Are we catching up? And then that kind of ties to some of the inflation conversation that we’re seeing. Where are we at on all that from your perspective?|
|Andrew Opdyke:||I think the supply chain is continuing to recover. I got the question. Actually, I’ve got a phone call on it this morning. Where are we on inflation? Is this peak inflation? Are we in the healing process from here? Is inflation going to decline? Supply chains reopen? Now, at the beginning of anywhere, where we sit today, Omicron is having some impacts, particularly internationally. Here domestically in the United States, I do not think we’re going to see shutdowns. I do not think that we’re going to see any type of shelter in place like we saw in March and April of last year, right?|
|With that, I think the US is continuing to reopen. We continue to add jobs. We ended last year, and we’ll get the final number here in just a few days on what December employment growth was. But through 2021, we’re still down about three, three and a half million jobs from where we were in February of 2020 when COVID started. We’re not fully back on the employment side. I think in 2022 we’re going to continue to see employment growing at an above trend pace. And when I say above trend, pre-COVID, we were adding 150,000 to 200,000 jobs per month.|
|I expect for this year that number’s going to be between 300,000 and 350,000, which means by the end of this year, we should be above February 2020 numbers. We should be hitting new highs from an employment standpoint. Now, that said, demand remains incredibly high. This is coming from a few different factors, one of which is the money that flowed into the system over the last year and a half, two years, right? We did massive stimulus that boosted economic activity in 2020, in 2021. That’s one of the potential headwinds we face this year.|
|Not necessarily because we have to pay that money back, but we don’t have that continued inflow of additional money. We have to kind of offset the reduction in government spending. But with demand still incredibly high and with our process still getting back on the supply chain side, I would expect during the first half of this year, inflation numbers may even move a little bit higher before they move lower.|
|But as we get into the year, as we get to the midpoint of 2022, as we get to the second half of 2022, I think we’re really going to start seeing some of that progress from this supply chain. I think we’re going to see capacity coming online and inflation is going to start to move lower. I think we’ll still see inflation up three to 4%, but that compares to six to 7%, which is where we’re at today. Inflation continues but starts to moderate as we get later into 2022.|
|Radon Stancil:||All right. I’m going to set this one up, my next question, and I am going to come from it from a completely neutral standpoint, but I’m going to ask about the political scene. I’m not trying to get an opinion on any kind of one side versus the other. Just purely politics and how it plays into the economy. Here’s things that we know based on headlines, based on what we know is happening. There’s has been some discrepancy on this infrastructure, amount of money to spend on infrastructure.|
|There’s been now this scenario where some from taxes like the child credit is not going to be in play for right now. From a political standpoint across the board, how do you see what’s potentially going to happen going forward into this year and how that will affect things?|
|Andrew Opdyke:||Yeah, absolutely. Well, it’s a midterm election year. 2022 is midterm elections and that does have implications in terms of what policy is likely to pass between now and November. One of the big questions as we moved into the layer part of last year, we got the infrastructure bill. Now, the infrastructure bill is going to take a little while to really find its way in the system. We just talked about how we’re still not back on an employment standpoint just nationally. When you add additional money in, you want to do bridge construction.|
|You want to do pipelines. You want to do water infrastructure. The problem they have is that they don’t have the employees to do that. Infrastructure is going to take a few years to work its way into the system. The other bill that was a major question last year was the Build Back Better bill. It was the budget reconciliation bill that originally got proposed at let’s say three and a half trillion dollars.|
|And then there was some debate among the Democrats, particularly with Joe Manchin, Kyrsten Sinema, who said, “We don’t want to spend three, three and a half trillion. Maybe we could do a trillion and a half,” which is still an incredibly large amount of money. But we made it to the end of the last year and the Build Back Better bill had not passed. Now, the Build Back Better bill is the bill that has more of the tax hikes associated with it, the corporate tax change, the individual tax change, changes to capital gains rates.|
|A lot of people were eyeing that from a market perspective, but it’s going to be a consideration. As we stand here in 2022, the closer that we get to elections, politicians don’t really like voting for tax hikes when they’re about to go up for reelection. And right now just based on history, it would suggest the party out of power, which now would be the Republicans, are in a position where they’re likely to pick up seats in the house at least, plus they own redistricting. They own a lot of the state level redistricting. So that in and of itself should give them a couple seats.|
|I think the Republicans will almost surely hold the House of Representatives at the end of this year. Whether this bill passes could be the difference between whether we see a red wave this year or whether we see a red tsunami. If they want to push it through, if the Democrats decide this is the priority, we’re going to look to work with Manchin, with Sinema. We’re really going to look to push through and get a package. Maybe it’s a trillion and a half. Maybe it’s less. Maybe they cut some of the pieces in order to get agreement.|
|But if they push it through and we see tax hikes this year, tax hikes historically are politically unpopular. Politics is going to play a big role this year on whether or not we get tax hikes, whether or not we see additional stimulus coming into the system. They’re very much weighing, do we push this through, or do we focus on those midterm elections that we have coming up at the end of this year?|
|Murs Tariq:||Got you. My next question may tie in a little bit to what you said and to the bill in general. Start with 2020 when the pandemic first started. The economy thrived off of certain sections of the market, which are pretty much technology and large cap companies. And that lasted for quite some time. Then we saw a shift into small cap in 2021, and then a shift back out of that a little bit. There were times of ebbs and flows to where one is really in control… Not in control, but in a lot of power and a lot of demand.|
|What do you see for 2022 as far as, hey, this section of the market may have still quite a bit of recovery to it or from the bill perspective of if we get a lot of more jobs added into the economy, where are those jobs really going? Where are we lacking manpower in the economy right now overall?|
|Andrew Opdyke:||Yeah. Earlier on, we were talking about what took place during 2020, what happened during 2021. I mentioned that last year we saw really strong earnings growth from S&P 500 companies, from companies as a whole. They were recovering from a low benchmark in 2020, but the earnings growth numbers last year were substantial. That’s going to slow this year, right? We went from double digits, 20, 30, 40% earnings growth year over year. Where this year I would expect that number is going to be closer to eight, nine, 10%. We’re getting back towards historical levels.|
|I think that from a market perspective, I think that the market growth rate is going to start to go back down towards more normal levels. Our target, we published this at the end of last year, our target on the S&P for this coming year is 5,250, which is about a nine to 10% gain from where we were. We’re not expecting 20, 30%. We think that the market is getting a little bit tougher. Price matters. Earnings power is really going to start to matter. When we have that environment over the last 18 months where earnings were rising so rapidly, that rising tide lifts all boats.|
|When that tailwind factor is done and people are going to get a lot more skeptical. They’re going to be looking. Because quite frankly, there are areas of the market where the price to earnings multiple has extended itself, where people have paid up for expectations of future growth that maybe haven’t materialized. I think over the next year, what we’re going to see is that earnings quality is going to matter a lot, companies whose valuations haven’t kind of exploded.|
|We see you a little bit of this on the cyclical, on the value side, where the multiples aren’t as extended as in some other areas. I think they’re going to benefit. I think we’re going to continue to see small and medium size businesses. As kind of COVID I hope, knock on wood, gets put behind us in 2022, they really benefit from the completion of this reopening process and from the international side of things. International, quite frankly, is another area where I think as they get further along in the recovery this year, the areas personally that I like.|
|I like a little bit of that value cyclical tilt because of the earnings quality there. I like small and medium sized businesses over the mega caps. I do have a little bit of an overweight on international because they’ve lagged us up to this point. And quite frankly, their fundamental suggests they’re due to kind of catch up with us. But again, earnings growth is going to be the driver. I would focus on the companies that are producing earnings, that are able to maintain margins.|
|But don’t be expecting the markets to move at the same pace that they have over the last two, three years, right? That was an unusual circumstance. I think we should reset expectations for 2022 and expect them to look more like they have historically, high single digits into low double digits for market growth.|
|Radon Stancil:||When we go through this with you, Andrew, we always kind of ask you, what are you concerned about? And then what are you looking forward to? We’d like to end it on a positive, so I’m going to start with this, and then we can conclude after this with the positive. But right now, if you had to look at 2022, and if you want to break this down in two instead of looking at the whole year and just say, “Hey, next quarter,” what are you saying, “Hey, I got a little bit of a concern over this and this is what we need to be looking for,” what would it be?|
|Andrew Opdyke:||One of the biggest concerns is watching how we respond from a governmental perspective, from a federal reserve perspective how they respond to inflation. We have about 18 months where the Fed kept saying inflation is transitory. This is a short-term thing, and it sustained for much longer than they expected. Now, we’ve been saying since the beginning, look, you put this much money into the system and it’s going to have consequences. It’s quite literally the definition of inflation, more money chasing the same or fewer goods when we have fewer workers.|
|It’s going to have impacts, and we’ve seen inflation at multi-decade highs. Now, the Fed started to shift their tune towards the end of last year, right? They pulled out. They said, okay, we’re going to retire the word transitory. They started signaling that they’re going to start maybe raising rates a little bit sooner. The question to me is, do they have the guts to do it? Will they stick with that, and will they address inflation, which I think they need to? I’m a little bit skeptical based on how they’ve reacted historically, some of the dovish tilts that they’ve put on some of their comments.|
|My biggest concern over 2022 is if the Fed kind of pulls back, doesn’t take the appropriate response to inflation, doesn’t start lifting interest rates, and they put us in a position where they have to raise rates faster and more substantially later in the year or into next year, which would have some significant volatility impacts on the market. The Fed is kind of the question mark for me this year.|
|My concern is that they don’t do what they need to do, because it’s easy to say, “Let’s let things keep rolling. Let’s let the economy keep moving,” that they stay too accommodated for too long, and that we end up getting paid back for that later in the year or, again, into early next year.|
|Murs Tariq:||All right. Well, we’ll see how all that plays out, and I’m sure that’s a concern of everyone one. I’ve got a two part end on a positive type of question. My first part, Andrew, is kind of looking backwards, looking back at 2021, since this is a bit of a recap of 2021, what maybe surprised you or made you feel good about last year?|
|Andrew Opdyke:||Yeah. I mean, one of the best things about last year and one of the things that I think was underappreciated is just how well companies performed, how much they were able to adapt. It’s not just companies, it’s individuals. It’s consumers. We adapted to the world that we were living in. We didn’t sit back and say, “Look, COVID’s here. There’s uncertainty here. We’re just going to stay at home, bunker down, shelter down. We’re not going to do anything.” We didn’t lose 2021. There was volatility. There was difficulty, but we continued to expand.|
|We are now at new highs from an economic growth standpoint. Last year was one of the best years for growth since the mid 1980s. We are now producing more than we did before COVID started. And again, we’re doing that with three million plus fewer workers. Progress has been made. And I think that the progress, the embracing of technologies, the embracing of productivity, improving tools over the last 18 months are going to have continued impacts here for the next few years.|
|The earnings growth was real. It was not that companies were just lifting prices with inflation. We saw real activity taking place. We saw real productivity gains taking place. I think it’s underappreciated just how well companies and individuals have performed after everything they went through in 2020.|
|Murs Tariq:||Right. Yeah. And then what are you very excited about for 2022?|
|Andrew Opdyke:||Quite frankly, I’m excited to get back to fundamentals. I’m excited to get past this part where the questions over the last 18 months are, how much is the government going to spend? How much money are they going to pump into the system? We knew that was never going to be sustainable, right? You cannot spend your way to prosperity. Ultimately, what has to happen is you got to grow jobs. You got to build businesses. You have to create products that people want, not just here, but internationally. The companies, they borrowed money over the last 18 months.|
|Right now they’re starting to be able to get some of those inventories as the supply chain heals. I think over the next year, as those supply chains come back, as they put the money to work that they’ve borrowed, and as people return to work, we have some strong opportunities to see… I don’t want to call it a revolution. After we saw something… We did massive spending during World War II, 1942, 1943. It’s the last time that we saw the money supply that we saw… The money in the system grow at the pace that we did over the last 18 months.|
|After that, we saw an Industrial Revolution, as we took the tools, as we took the machines that were making planes and ammunitions and tanks and we converted them and made machinery. We converted them and we made washing machines. We saw this industrial breakthrough that led to productivity gains. I think right now the technology we’ve adopted over the last 18 months, the new tools we have from a healthcare standpoint, the tools that we have from a technology standpoint, we have some incredible things I think we can see this year as those really get put to work to grow us sustainably into the future.|
|Well, this year is not going to see the same market growth or economic growth that we saw in 2021. We’re going to continue to move forward, and we’re going to be moving forward on those key items that sustain us into the future. That is the growth that we need over time. It’s the growth that can continue to propel us in 2023 and beyond. That return to the fundamentals, moving away from temporary outside factors as drivers of growth to me is something I’m very excited about for the year ahead.|
|Radon Stancil:||Well, Andrew, as always, it does give us very nice perspective. It’s always a pleasure to hear both sides. Hey, here’s our potential problems. Here’s what’s looking good. I think it helps us be able to be balanced. I know our list love it. I just want to say thank you so very much for coming on and chatting with us again today.|
|Andrew Opdyke:||Absolutely. Thank you so much for having me. I look forward to our next talk.|