Whether you’re happily embracing the new normal or wistfully missing the old one, it’s clear that the Covid-19 pandemic, which shut down the world for more than a year, finally seems to be in the rearview mirror.
But that doesn’t mean advisors shouldn’t expect post-pandemic economic and stock market challenges, including a likely 2022 slowdown, inflation, overvaluations and persistent labor shortages, according to Dr. David Kelly, chief global strategist at J.P. Morgan Asset Management, and Philip Orlando, chief equity market strategist and senior vice president at Federated Hermes. The two spoke Thursday at the Next Chapter conference sponsored by Financial Advisor.
“We think 2022 will come in like a lion and go out like a lamb with 2% growth,” said Kelly, who spoke on a panel called “The Economic and Market Outlook for the Post-Pandemic Environment.”
“Fiscal stimulus is driving the economy right now,” Kelly said. “In terms of numbers and GDP, we think we’ll get about 10% or more GDP growth in the second quarter and by fourth quarter, year over year, we think we could be up 7.5%. … So, it looks like we’ve had a surge of productivity in the pandemic, not just recovering but recovering to a better place than we expected even two years ago. And then the economy is just going to slow down,” maybe ticking along at 2% growth, he added.
Kelly is predicting that corporate earnings are likely to rise more than 50% this year to all-time record highs. But valuations are still somewhat high, he warned, “and we do think that earnings will grow more slowly in ’22 and beyond because of the greater wage pressures and interest rates. Stocks overall aren’t cheap and you need to be selective.”
At the same time, the uptick in inflation is not fictional. It’s genuine, he said.
“We’ve seen 4.9% year over year growth in CPI in the month of May. There are a lot of things feeding through to this, including supply chain issues, shortages of various kinds, all this demand. So a lot of this is transitory, but some of it we think will stick.”
While the term “the new normal” was coined following the financial crisis and indicated lower inflation, “It’s almost like this pandemic recession and massive stimulus kicked us back up to the old normal, with inflation running above 2%,” Kelly said.
Overall, he sees a healthy economy, “but you have to look at valuations.”
“I think particularly we look at overseas markets, and you can see some better valuations that exist than in the U.S. equity markets or U.S. fixed-income markets right now.”