Market Commentary & Forecast

Russia's unprovoked attack on Ukraine has dealt a blow to economic expectations and the confidence of consumers and investors around the world. Year-to-date, global equity indices are off approximately 8%, while broad measures of fixed income have shed 5.5%. Meanwhile oil has surged more than 40%, gold is higher by more than 6%, and soft commodities and industrial metals are nearly all measurably higher as well. While we hope that Russia will halt their invasion and that the West can address the humanitarian crisis in Ukraine, our fear and base case is that this war will continue, leaving thousands more dead. It has already steamrolled key economic assumptions. When I peered into 2022 at the end of 2021, I forecasted higher market volatility in the face of rapidly waning fiscal stimulus and an incremental ebb from historically accommodative monetary policy in the U.S. However, I also believed that these shifts, coupled with a transition toward Covid as an endemic but more manageable public health concern, would allow inflationary pressures—albeit still historically elevated—to wane significantly in 2022.

Following a year in which Covid-19 steamrolled the economy and wrought havoc on lives around the world, 2021 brought a measure of long-awaited stabilization. Despite a still-rising death toll, new variants, and supply-chain problems pumping the brakes on the global reopening, the year is poised to end with significant economic momentum, backfilled in large part by record levels of debt-fueled fiscal stimulus. In the U.S., full-year GDP growth will likely register around 5.5% after contracting 3.5% in 2020. As we peer into 2022, we expect to see further normalization of the economic picture as supply-chain bottlenecks are improved, vaccination rates increase, and fiscal stimulus and key measures of inflation in the U.S. both decelerate. These trends should give the U.S. Federal Reserve latitude to begin unwinding their extraordinary asset purchases sparked by Covid, even as they continue to ponder the timing and degree of actual hikes in the Fed Funds Rate. Our view is that while the Fed would prefer to bring rates back toward a more traditional relationship with inflation, speed bumps in the economy as well as political pressures from massive debt could inspire a dovish posture for longer than many expect.

The third quarter of 2021 continued the tug-of-war between uncertainty and self-assurance in the global marketplace. Several concerns took their toll on stocks late in the quarter, including those over the Delta variant, a more cautious U.S. and international consumer, potential economic fallout from China’s faltering real estate sector, and data confirming that the elevated GDP growth of Q2 was, indeed, the likely peak of this cycle in the U.S. Nevertheless, the broader economic reopening story appears intact. As hospitalizations and case counts generally decline, we are adjusting to our new normal—which is to say: finding ways to live with the virus, perhaps indefinitely.

The second quarter saw a sharp spike in GDP growth and a well-advertised rise in inflationary pressures, as demand rose in the face of supply chain bottlenecks affecting everything from new cars to lumber. Employers, particularly in the hospitality sector, were caught in a similar vise, with a wave of pandemic-weary customers returning just as the supply of employees proved constrained by return-to-work fears, limited childcare options, and sustained unemployment bonus incentives.

As we pass the first anniversary of the lockdowns that rocked our nation and world, we at Clear Harbor are both astonished and grateful that many of you have received at least one dose of Covid-19 vaccine. Like you, we remain forever grateful to those in the scientific community who made it possible to look beyond the painful losses of the past year and make our way through 2021 with growing confidence. We are also thankful to all of our clients who leveraged our work and professional resources during this period, including in ways that some had perhaps never imagined. At moments like this we realize the importance not only of family, but of strong partnerships across those other, larger communities—professional, civic, social—of which we are so fortunate to be a part.

As our annus horribilis draws to a close, the craving is palpable for an annus mirabilis next year to make up for it. Many prospects are indeed bright: the record-breaking development and initial distribution of coronavirus vaccines; a new aid package ultimately signed by the outgoing American president; the conventional manner of his successor. All promise that a return to some sort of “normal” is at hand. We have paid a heavy price for such a return, in both human and financial terms. Yet much of what the pandemic changed will not revert so simply. In fact, some long-term shifts in how we live and work will likely accelerate further. And even as the rhythms of our personal and business dealings revive, certain structural headwinds to the U.S. economy will persist—and with them, a degree of secular stagnation.