A fourth-quarter “red tsunami” in November's midterm elections will serve as a catalyst for a powerful year-end rally, Phil Orlando, chief equity strategist at Federated Hermes, predicts. This scenario is not predicated on Republican House members unveiling a magical agenda that solves some of America’s most intractable problems.
Instead, if Republicans retake the House of Representatives, it will silence all the political conversation about more trillion-dollar social programs lacking any clear political mandate, Orlando said in an interview last week. While Biden won the 2020 election by seven million votes promising a return to normalcy, Democrats lost 13 seats in the House of Representatives in 2020. Many of those losses came in swing districts where voters were turned off by the agenda of the party's left wing.
Constant chatter about higher taxes on the rich will also pipe down and be off the table, he added. While the social programs outlined in the Build Back Better bill had merit, Orlando notes they were extremely expensive and plans to pay for them were muddy. Meanwhile, hundreds of billions in previous, pandemic-related stimulus programs still remains unspent.
Consumers are suffering through a period of inflation in supermarkets and at gas stations, but Orlando doesn’t see equity investors sharing in the same pain. He expects the S&P 500 to close out 2022 at 5,300 after experiencing several corrections of about 10% that will take it down to 4,400, He also sees GDP rising an impressive 3.9%.
This year he forecasts that the S&P 500’s earnings per share will climb from $210 to $230 and then jump to $250 in 2023.
Consumers remain flush, despite psychological pandemic fatigue. With some workers recalcitrant to return to the workplace, Orlando said the “practical minimum wage” sits between $15 and $20 an hour depending on the job and region.
A higher living standard for lower-income Americans is a “good thing,” he said. Meanwhile, folks in the affluent suburbs with houses and 401(k) plans up over 50% since March 2020 will be hungry to spend money on travel and other leisure activities.
Orlando said the U.S. economy is strong, so strong that he expects the Fed to raise its Fed funds rate four times in both 2022 and 2023, taking it to 2.5%. None of this is helping the Biden administration.
Both “the Biden administration and the Federal Reserve completely miscalculated inflation,” he said. They weren’t the only experts to miscalculate, but they are the ones taking the blame.
In retrospect, the notion that governments around the world could orchestrate a complete shutdown of huge areas of business activity and then reopen without disruption is proving to be fanciful. Orlando noted that, in recent months, average hourly raises have been rising at nearly a 7.0% annualized pace. Most of that percentage gain is coming at the lower end of the wage spectrum, where employers struggle to find workers. In normal times, wage inflation of 4% can trigger recession concerns.