Fed tightening of monetary policy will augment slower economic growth this year that could even turn into a recession. My Dec. 10 column explained that a big inventory cycle may unfold soon as consumers, satiated by early holiday gift-buying, meet growing supplies of goods as all those ships from Asia are finally unloaded and their cargoes are distributed and hidden inventories surface.
In November, real spending on consumer goods fell 0.8% after October’s 1.5% jump. With the Omicron scare, restaurant seatings nationwide were down 27% in the week ending Dec. 26 from 2019, a steeper decline than in late November, reports reservation site OpenTable. Wall Street economists are busy cutting their forecasts of first quarter real GDP growth from the 5% to 6% range to 2% to 3% at annual rates.
Not only is the Fed reversing course from ease to credit restraint, but barring a recession, further rounds of fiscal stimulus are also unlikely. So the consumer-driven economy is on its own.
Investors polled by the American Association of Individual Investors found that 42% expect stock prices to fall over the next six months, the most bearish reading in over a year. Perennially bullish Wall Street strategists foresee a small 4.5% gain in the S&P 500 in 2022, a disappointment after the 27% jump in 2021. FactSet reports that the number of companies issuing negative earnings guidance for the fourth quarter was greater than the upward revisions for the first time since the second quarter of 2020 in the depths of the pandemic.
Many economic and financial market uncertainties lie ahead in 2022, so I urge investor caution with equity emphasis on defensive stocks such as consumer staples and utilities while soft-pedaling growth stocks and consumer cyclicals. With my forecast of fading inflation and economic weakness, Treasury bond prices will climb.
Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a registered investment advisor and author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation. Some portfolios he manages invest in currencies and commodities.