4Q 2021 Market and Economic Overview

A fear of missing out (or FOMO) has driven many asset classes to recent new highs. Elevated exuberance is rarely good. High starting points inevitably imply lower future returns. A potentially false confidence resides in the fact that policymakers will do what it takes to sustain the boom in (almost) everything. 2022 is likely to be marked as the first time since the Global Financial Crisis where we see a broad tightening of monetary conditions. This will occur at the same time that the recovery boom post the covid-crash will be replaced by a transition towards steadier growth. The ongoing coronavirus panic combined with heightened geopolitical risks add to uncertainty levels. Against this background, it seems hard to believe that the recent party that most pro-risk asset classes have enjoyed will continue. If it does, then it certainly won’t be with the same relative linearity witnessed over the past twelve months. Our expectation is for a possible near-term reset followed by a potential second half recovery, particularly should monetary conditions loosen once again. 2021 marked the third consecutive year in which the global equity market has generated a double-digit return. Certainly, earnings estimates have risen markedly over this period, but expectations (not to mention valuation levels) going into 2022 are now correspondingly higher. We also note how market breadth has narrowed substantially over this period, with a small number of (mega-cap tech) stocks driving an increasing percentage of relative outperformance.