Our key conclusions include: 

  • Continued above-average global economic growth, but at a pace that is slower than what we saw last year.
  • Extremely tight labor markets, especially in the U.S. We think more people will return to the workforce as COVID fears fade, but there likely will still be a continued mismatch of demand and supply.
  • Predicting a bad outcome for inflation in 2022 isn’t exactly much of a risk, in our opinion.
  • In addition to the start of a new monetary tightening cycle, some economists are concerned about the next “fiscal cliff” facing various countries, the U.S. in particular. While there will be a negative fiscal impulse in the sense that the extraordinary stimulus of the past two years will not be repeated, we believe the impact should be less contractionary than feared.
  • Geopolitics are always a wildcard but don’t often become a focus that exerts a big impact on markets. This year might be an exception if Russia invades Ukraine. It would almost certainly cause a further massive spike in European energy prices, given the region’s dependence on Russian natural gas.

Watch the economic outlook

Transcript

- Hi, I'm Heather Corkery, managing director of client portfolio management here at SEI. Today, I'm here with chief market strategist and senior portfolio manager, Jim Solloway, who will be presenting our economic outlook for the new year.

- Thanks, Heather. Let's start with a quick recap of last year. With the exception of inflation, 2021 largely played out as expected. While our beginning of the year forecast did not anticipate such a sharp acceleration in the inflation rate, we did point out that growth and inflation were likely to accelerate and SEI's portfolio managers were positioning diversified portfolios for upside inflation surprises.

- What do you see as the major themes for the new year?

We've put together a chart that highlights our forecast for both last year and the year ahead. It is a stylized depiction of our views on a variety of topics important to investors. Our original forecast for 2021 made at the end of 2020 are represented by the boxes in the top bar for each category. The actual outcome for the year is represented by a check mark. These forecasts pertain to the US, but they would not have been all that different for other developed countries. For the new year, we're forecasting continued global economic growth that is above average, but at a pace that is slower than what we saw last year.

We also anticipate extremely tight labor markets, especially in the U.S. We think more people will return to the workforce as COVID fears fade, but there likely will still be a continued mismatch of demand and supply.

Predicting a bad outcome for inflation in 2022 isn't exactly much of a risk in our opinion. In terms of monetary policy, the U.S Federal Reserve is expected to begin a multi-year rate hike cycle in the near future.

Outside the U.S, the Bank of Canada and the Bank of England are under the most pressure to pivot toward tighter monetary policy. The Bank of England raised its bank rate by a small amount in mid-December, the first hike among the most important central banks. The European Central bank, the ECB, and the Bank of Japan, the BOJ, appear likely to follow suit.

In addition to the start of a new monetary tightening cycle, some economists are concerned about the next fiscal cliff facing various countries, the U.S in particular. While there will be a negative fiscal impulse in the sense that the extraordinary stimulus of the past two years will not be repeated, we believe the impact should be less contractionary than feared. Geopolitics are always a wild card, but don't often become a focus that exerts a big impact on markets. This year might be an exception if Russia invades Ukraine. It would almost certainly cause a further massive spike in European energy prices, given the region's dependence on Russian natural gas.

- Jim, let's talk about investor sentiment for a moment. Equity markets have been delivering some good returns for quite some time. Nobody wants that to end. Should we brace ourselves for disappointment?

- The trajectory of S&P 500 earnings growth probably will slow next year. But again, in the 8% to 12% range seems consistent with our macroeconomic call for continued above average growth and inflation. How that will be reflected in stock prices is less certain.

- Less certain as in good or less certain as in bad?

- We're forecasting an average year where large-cap equities manage a 10% total return. Of course, that forecast is almost certain to be off the mark. It's best to view it as a central tendency around a large margin of error.

- Thanks, Jim, we always appreciate your insights. Read our latest economic outlook for more of SEI's insights. Thank you.

Expand

Legal Note

Important Information

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.

SIMC develops forward-looking, long-term capital market assumptions for risk, return, and correlations for a variety of global asset classes, interest rates, and inflation. These assumptions are created using a combination of historical analysis, current market environment assessment and by applying our own judgment. In certain cases, alpha and tracking error estimates for a particular asset class are also factored into the assumptions. We believe this approach is less biased than using pure historical data, which is often biased by a particular time period or event.

The asset class assumptions are aggregated into a diversified portfolio, so that each portfolio can then be simulated through time using a monte-carlo simulation approach. This approach enables us to develop scenarios across a wide variety of market environments so that we can educate our clients with regard to the potential impact of market variability over time. Ultimately, the value of these assumptions is not in their accuracy as point estimates, but in their ability to capture relevant relationships and changes in those relationships as a function of economic and market influences.

The projections or other scenarios in this presentation are purely hypothetical and do not represent all possible outcomes. They do not reflect actual investment results and are not guarantees of future results. All opinions and estimates provided herein, including forecast of returns, reflect our judgment on the date of this report and are subject to change without notice. These opinions and analyses involve a number of assumptions which may not prove valid. The performance numbers are not necessarily indicative of the results you would obtain as a client of SIMC.

We believe our approach enables our clients to make more informed decisions related to the selection of their investment strategies.

For more information on how SIMC develops capital market assumptions, please refer to the SEI paper entitled “Developing Capital Market Assumptions for Asset Allocation Modeling.” If you would like further information on the actual assumptions utilized, you may request them from your SEI representative.