The maths of the US labour market
This week the team at TwentyFour have been busy compiling our 2022 fixed income outlook, which will be published next week. There is no doubt we are confronted with a challenging set of circumstances, which will provide investors – not just in fixed income – with headwinds in the year ahead, and in particular we think during the first half.
Essentially, we have policy makers still entrenched in very early cycle behaviour, the economy itself seems to be in mid-cycle, while valuations in many asset classes are already looking decidedly late-cycle. These three factions do not sit comfortably together, and in our view they need to converge in 2022. How they converge is going to dictate the roadmap for the year ahead.
We are not the only ones publishing an outlook, of course; the investment banks produce impressive research pieces covering all asset classes which we find fascinating reading, and the dominant theme of these has been one of caution. Generally they see slowing but above average growth, a niggling persistence of inflation, the onset of tightening financial conditions, the potential for policy errors, challenging valuations (especially in the US), and of course ongoing supply chain issues hurting companies’ ability to pass on price rises and impacting margins – though this is all with a backdrop of strong credit fundamentals and an expectation of continuing low default rates. The result, they think, is weaker equity markets, higher yields and wider spreads. Not the ideal backdrop at all.
Importantly, these new outlooks are hitting investors’ desks one after another in a short period of time, which makes for sobering reading and will most likely put a lid on risk appetite in the short term, making a ‘Santa rally’ less likely. However, this can also have the effect of obscuring the positives we see, such as the aforementioned credit fundamentals, the attractive yields still on offer in certain sectors, and the numerous options bond investors have for protecting their portfolios from these trends. All is not lost, despite the reams of pessimism currently landing on our desks!
In our 2022 outlook we will explore what this means for all parts of the fixed income universe, and how investors can consider positioning to sidestep some of the more obvious risks while still embracing the ongoing strong fundamentals. In addition, we will be publishing a series of short blogs over the next week or so looking at some specific strategies investors can consider as they look ahead to 2022.
We trust that you will find them useful, and we look forward to engaging with you.