2022 Global Market Outlook

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Patience will be key to positive performance in 2022.

Our approach is to invest in companies with predictable cash flows, earnings, and sales. We expect significant divergence in asset classes (growth vs value) and within different sectors. We believe firms with fixed costs will fare better than those with variable costs of goods sold.

Scott Tremlett, CFP®, ChFC® | Managing Partner

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Patience Will Be Necessary:

A look at leading indicators:

Indicator	Summary	↑ – ↓
J.P. Morgan Global Manufacturing PMI™ Index	Manufacturing PMI at 15-month low 2	Negative ↓
IHS Global Sector PMI™	Signals higher output in 17 out of 21 sectors3 Top Five Sectors: Healthcare Services, Pharmaceuticals & Biotechnology, Insurance, Banks, Other Financials	Positive ↑
J.P. Morgan Global Composite PMI™	Global economic growth eases to 1.5 year low4 – Strongest: Ireland and United Kingdom – Weakest: Japan, Spain, Australia	Negative ↓
International Monetary Fund (IMF)	Projecting 4.4% global GDP growth in 20225 – Emerging Markets 5.9% (India 9.0% = #1 Ranking) – United States 4.0%	Positive ↑
US: Leading Economic Indicators®	Project robust 3.5% year-over-year growth6 Omicron, rising prices, and supply chain disruptions did slow the 6-month growth rate	Positive ↑
US: Manufacturing PMI™	Lowest level since October 20207 Output and new order growth slow amid supply and labor shortages Business confidence picks up to 14-month high	Negative ↓
US: IHS Markit US Sector PMI™	5 of 7 sectors increasing business activity8 Heathcare and Financials register fastest expansions	Positive ↑
Canada: Manufacturing PMI™	Output, new orders, purchases, employment, and sentiment all improved9 COVID-19 cases and material shortages weigh on output growth Inlfationary pressures continue to ease	Positive ↑
Brazil: Manufacturing PMI™	Factory orders and production contract at fastest rates in over 1.5 years10 Employment declines for first time in ten months Inflationary pressures receded further	Negative ↓
Mexico: Manufacturing PMI™	Manufacturing downturn intensifies as pandemic escalates11 Input cost inflation holds close to December 2021 five-year high	Negative ↓
Eurozone: Leading Economic Indicators®	Highest level since pandemic began12 Consumer expectations dropped significantly	Negative ↓
Eurozone: Composite PMI®	Economic growth regained momentum to reach strongest pace since September 202113 Demand for euro area goods and services increased for twelfth consecutive month	Positive ↑
Germany: Manufacturing PMI®	New order growth hits six-month high in February 202214 Factory cost inflation falls from recent highs	Positive ↑
Netherlands: Manufacturing PMI®	Fastest rise in new orders since October 202115 Input price inflation eases as supply chain pressure dips	Positive ↑
Italy: Manufacturing PMI®	Output growth slows to 12-month low amid Omicron challenges16 Supply disruptions ease, cost of inflation slowest in 10 months	Negative ↓
UK: Manufacturing PMI®	Production rises at fasest rate in six months17 20 consecutive months of positive growth	Positive ↑
UK: Leading Economic Indicators®	Remains constant, in contraction overall18 Consumer expectations near all-time lows	Negative ↓
ASEAN: Manufacuturing PMI™	Solid manufacturing growth despite surge in COVID-1919 Strength driven by improving new orders	Positive ↑
Asia: IHS Markit Asia Sector PMI™	10 of 18 sectors registering higher output, lowest total since September 202120 Strongest growth in industrial services and technology equipment	Negative ↓
China: Caixin General Services PMI™	Business activity slows to five-month low in January21 Sharp increase in average input costs, inflation increases	Negative ↓
China: Caixin Geneal Manufacturing PMI™	Slight improvement in business conditions22 Fastest increase in total sales since June 2021	Positive ↑
China: Leading Economic Indicators®	Highest on record23	Positive ↑
India: Leading Economic Indicators®	Near highest on record24	Positive ↑
India: Manufacturing PMI®	Output and new orders expand as input price inflation softens to six-month low25 Business optimism improvest to 4-month high	Positive ↑
Indonesia: IHS Manufacturing PMI®	Expansion slows amid COVID-19 resurgence26 Business confidence declines to 21-month low	Negative ↓
Australia: IHS Manufacturing PMI®	Production returns to growth as COVID-19 disruptions ease and employment levels rise rapidly27	Positive ↑
Japan: IHS Manufacturing PMI®	Signals further improvement in operating conditions, although the rate of expansion eased with renewed rise in COVID-19 cases28	Positive ↑
Japan: au Jibun Bank Japan Services PMI®	Business activity falls at sharpest pace since August 2021 due to Omicron variant29 Employment levels rise for first time in 4 months	Negative ↓
Russia: Manufacturing PMI®	Output and new orders fall for the first time in six months30 Fastest decline in employment since August 2021	Negative ↓
Russia: Services PMI®	Service business activity accelerates to 7-month high in February31 Business confidence reaches 5-month high	Positive ↑
South Korea: Leading Economic Indicators®	Two-thirds of indicators growing with balance of trade moving into positive territory32	Positive ↑
South Korea: IHS Manufacturing PMI®	Output levels rise amid strong new order growth33 Business expectations stregthen to 12-month high	Positive ↑

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Paramount Global Rankings

(as of January 2022)

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Wall Street Says

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Market Outlook, 2022

Looking at 2022, we expect positive economic growth and elevated inflation. Inflation will begin the year in record territory. We anticipate inflation to slow, with demand reducing with higher interest rates and supply increasing as supply chain disruptions begin to reopen.

We believe the global economy is in mid-cycle and we remain positive to equity risk assets. We do also believe that this isn’t a ‘normal’ mid-cycle environment for markets. Historically, mid-cycle markets are periods where valuations are reassessed and technology, communication services, and discretionary stocks outperform. However, historically the US economy takes 3 years for earnings to revert back to pre-recession levels. In 2021, (after the initial shock of COVID-19) revenues returned to pre-recession levels in 11 months. This theme presents challenges to certain sectors and individual companies where valuations continued to stretch throughout 2021 with the extreme ‘snap back’ in the US economy. This valuation reassessment created sharp drops to high valuation growth stocks in the fourth quarter of 2021.

Along with the change in valuations we have record level inflation. Inflation means increases in the Federal Funds rate. When interest rates rise, valuations compress (see below: How Do Rising Interest Rates Affect Stocks?). Mid-cycle markets are normally the longest period in the economic cycle, and market trends will change. Today, we believe there is a place for select technology firms to thrive. Yet, we are not believers in communication services and discretionary stocks outside of a few particular names. With interest rates increasing we favor financials; more specifically, broker/dealers and regional banks. Our research illustrates these two sub-sectors as the largest benefactors to rising rates. We feel that supply chain disruptions and slowing demand will have a greater impact on discretionary stocks than defensive areas like healthcare and consumer staples. Typically, consumer staples outperform in recessionary periods. We are not predicting a recession. We are taking into consideration the differences in economic cycle this time around. With the speed of the economic recovery and the rapid rise in inflation, we believe markets will exhibit certain mid-cycle trends as well as late-cycle movements.

Another trend for 2022 is limited diversification between stocks and bonds. Rising rates do have a negative effect on both asset classes. From 2015-2018, the S&P 500 dropped an average of -0.4%⁴¹ the day the Federal Reserve increases rates and -0.9%⁴¹ the in the next month. In 2018, the Fed moves were coupled with pronounced volatility. Four rate hikes were followed by: +3.8%, -5.4%, -8.5%, and +6.6%⁴¹ monthly returns. As for bonds, the volatility depends on the duration of the bond. Duration is a measure of sensitivity of the price of a bond to a change in interest rates. For example, the US Aggregate Bond Index (as measured by AGG ETF) has an effective duration of 6.64⁴². That means the price of the portfolio will move conversely to a +/-1% shift in rates by +/-6.64%. While this isn’t a perfect science, and there are bonds that have variable interest rates to offset increases in interest rates (floating rate bond/note), we have decided that cash is a better investment than core bonds. Cash may not pay high interest but the price is not impacted by increases in interest rates (0% is preferred over -4%).

The dynamics are there for increased volatility. During periods of volatility we focus on the downside capture of our portfolio. Downside capture is a statistical measure of overall performance in down markets. We prefer investments that may limit downside movements. Our strategy going into 2022 is to win by losing less during periods of market contraction. We do believe by year-end markets will turn positive.

2022 Investment Themes:

(1) We prefer US equities to overseas equities
(2) We see headwinds to both Emerging Markets and International Developed Markets
(3) We will see high inflation in 2022 – we expect inflation to slow throughout the year
(4) We think that treasury yields will increase
(5) We believe that lower valuation stocks will outperform
(6) We believe the best returns are made when consumer confidence is negative

(1) US > OVERSEAS

The US is showing relative strength in every category. US earnings are expected to increase marginally. Corporate America has increased margins in 2021 to help offset increases in costs of goods sold. We see financials benefiting from increasing interest rates due to Federal Reserve expectations.

(2) UNDERWEIGHT EMERGING MARKETS & INTERNATIONAL DEVELOPED MARKETS

There are bright spots in India, Netherlands, Canada, and Spain. Momentum is negative in Australia, Brazil, Germany, Japan and the United Kingdom. European economics in significant downward trend. There has already been significant movement in rankings between January to February; for example Australia down 10 spots, from 8 to 18 in one month.

(3) HIGH INFLATION

Inflation will remain high until easing later in 2022. Policy changes from the Federal Reserve to slow growth and the easing of supply chain disruptions will gradually reduce inflation. Recent used car sales statistics do illustrate fading demand due to higher prices.

(4) INCREASE IN YIELDS

Stronger growth and inflation typically increase bond yields. Fiscal policy is expected to increase money supply.

(5) SIGNIFICANT PREFERENCE TO LOW VALUATIONS

With the change in Federal Reserve policy first highlighted in Q1 2021, we see the divergence between low valuation and high valuation stocks. We believe technology still holds a place in a portfolio, however we see significant headwinds for companies with unstable earnings and variable costs of goods sold.

(6) CONSUMER CONFIDENCE AND MARKET RETURNS

What US equity factor is the most predictive of future market returns? Most investors will answer ‘Fundamentals’ or ‘Momentum’ – however studies by Roger Ibbotson (Professor in Practice Emeritus, Yale School of Management) illustrate that the biggest contributor or detractor is actually Popularity. Traditionally market participants expect the greater the risk = greater return. Studies have shown that returns are not necessarily risk based. In reality the less popular the characteristics of a stock/asset class may be = the greater the return. From the period 1980 – 2016 the highest popularity stocks averaged 7.67%⁴³ and the stocks with the least popular characteristics averaged 15.30%⁴³.

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Investor Education

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Asset Allocation Review

US Equity:	Positive
Developed Int’l Equity:	Neutral to Negative
Emerging Markets Equity:	Negative to Neutral
US Government Bond:	Sell
US Corporate Bond:	Sell
International Bond:	Sell
Emerging Markets Bond:	Sell
REIT/Commodity:	Positive
Preferred Sectors:	Financial Services, Technology

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REFERENCES

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DISCLAIMER

The views expressed represent the opinion of Paramount Associates. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources believed to be correct and current, but it should not be regarded as complete, an endorsement or personalized investment advice. Forward look- ing statements are speculative and based on assumptions as well as known and unknown risk and uncertainties. Past performance is not indicative of future results. The appropriate- ness of an investment or strategy will depend on an investor’s circumstances and objectives. These opinions may not fit to your financial status, risk and return preferences. Nothing contained herein constitutes financial, legal, tax, or any other type of advice. A professional advisor should be consulted before implementing any investment strategy.

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