Our Director and CEO Emeritus Jim Rudd, has long been a fan of the Wayne Gretzky quote, “don’t skate to where the puck is, skate to where it is going.” While it important to keep an eye on current data, it is more important to understand current data in the context of where you think the puck, or the economy in this case, is going. Let’s look at what is currently going on in Washington and the economy, and where we expect they are going later this year and into 2022.
How the Sausage Gets Made
Watching Congress work, especially as they get closer to deadlines, can be very frustrating for investors. It reminded me of the idiom, “how the sausage gets made.” More than likely we as concerned bystanders don’t want to see the complicated process, but in the end, they do what needs to be done. This week, there were several items on Congress’s agenda including funding the government, raising the debt ceiling, voting on an infrastructure bill and, finally, hearing an aggressive reconciliation bill.
Congress did accomplish a short-term funding solution but everything else on the list became part of the typical horse trading that comes along with major funding bills. For beltway junkies, this is interesting and fun political theater. For the markets, it is more background noise. Whether done through reconciliation, or on its own, we believe the debt ceiling will be raised, but in the short-term is causing unnecessary stress in the markets. We believe a stimulus package will be passed in the neighborhood of $1.5 - $2 trillion. We also believe an infrastructure bill will make it through Congress as well. So rather than hedge our bets in the short-term, we have positioned portfolios and counseled clients with the expectations that they will get done and we are skating to where we believe the puck is going.
The Re-reopening of the Economy
Economic data continues to be strong, but supply chain and employment bottlenecks are keeping the economy from reaching its full potential and causing stubbornly high inflation. Will this congestion get solved over time? Absolutely. Will employment start to rebound in the coming months as extra unemployment benefits and the Delta variant of the Coronavirus subsides? Certainly. This process will not be a straight line, and there will be setbacks along the way. Could COVID cases pick up this winter when we all move back indoors? Possibly. As always, we use data when approaching these issues.
2022 is shaping up to be a year when the economy finally opens all the way up. It may take until spring or early summer for this to happen. What is important, is that we believe it will happen, and we need to position portfolios not for short-term disruptions, but long-term outcomes. With that in mind, we continue to be overweight stocks relative to bonds, and we continue to overweight cyclical sectors of the economy relative to defensive areas of the economy. In the chart below you can see the relative performance of healthcare, consumer staples and utilities (historically defensive sectors) compared to the S&P 500 since the beginning of the year.
Source: Refinitiv Eikon
The lack of defensive leadership signals to us that the market is not expecting an economic slowdown, and neither should we.
Takeaways for the Week:
Whenever the nation watches Congress too closely, frustration is sure to set in
Markets are signaling that despite current supply chain bottlenecks, 2022 is shaping up to be the re-reopening of the economy