Despite what listening to the mainstream media might make you think, the voting public doesn't change much from year to year or election to election. As a result, when leaders try to take policy too far in one direction, without enough public support, they often get punished at the polls.
With the election results from last week, it is clear that the GOP is in an excellent position to win the house and the senate next year. However, the mid-term elections are still a year away. The Congress and the President will still have plenty of time to enact legislation they agree on, before submitting themselves to the voters. That happened late last week when the House rubber-stamped a "bipartisan" $1 trillion infrastructure spending bill passed this summer by the Senate, sending it to President Biden's desk. This bill will generate extra spending for highways, mass transit, airports, water systems, Amtrak, broadband, electric-vehicle charging, and "renewable" energy.
This spending shifts resources from the private sector to the public sector, and to the extent that this is paid for by Federal Reserve money printing, it will push inflation higher. However, this bill did not create new entitlements and is a small part of total nominal GDP over the next 10 years – which the Office of Management and Budget pegs at $282 trillion. Despite this spending, the budget deficit should be substantially smaller in 2022. Unless another big spending and tax bill passes.
The new bill that raises taxes and creates new entitlements has lost momentum. Right now, we put the odds of passage of this much more economically harmful legislation at less than 50%, in part because of last week's election results.
However, this legislation remains a threat to the forecast for 2022 and beyond. As does monetary policy. The financial markets appear to expect two or three rate hikes in 2022. But personnel changes and political pressure at the Federal Reserve will make it less hawkish. As a result, we are looking at one rate hike very late next year, but no more than that.
In addition, businesses across the country must be wondering what's going to happen with the Biden Administration's draconian COVID-related OSHA rules, which mandate vaccines for "private" companies of over 100 employees. This would deter some workers from seeking jobs while making it much more costly for many businesses to hire. Oddly, these new rules coincide with the arrival of new treatments that should make the vaccine debate obsolete. A federal court has temporarily put the rules on hold. Hopefully, for the job market's sake, policymakers rethink the rules and decide to withdraw them.
From a forecasting point of view, 2021 was simple. Solid economic growth, higher inflation, and a bull market in stocks have been our mantra all year along. As we focus on 2022, the Fed is still pumping money, interest rates remain low, and the economy continues to add back the jobs it lost during lockdowns. At the same time, election results show a backlash against a bigger government. For 2022, we watch with cautious optimism.
According to FactSet Research, as of Friday last week we have received results from about 89 percent of the S&P 500 component companies. Of the 89 percent that have reported results, 81 percent of the companies have beaten earnings expectations while 5 percent have met expectations and 14 percent have fallen short. This is the reason the stock market continues up despite the inflation news. Markets move on earnings, not politics. Although politics can affect long-term growth in earnings if they put undue pressure on corporations, such as the vaccine mandate.
Last week, the major theme of the week for many investors was the November Federal Reserve FOMC meeting at which the market was expecting Chair Powell to announce the commencement of a tapering program. Chair Powell did announce that the Fed would begin tapering its asset purchase program by $15 billion per month during November and that the Fed would continue to taper at a rate of $15 billion per month through the end of December. What this means is that the Fed, for the next couple of months, is not printing as much money. As you know from past commentaries, I repeated my concerns about how much money is being created. Any printing of money is very inflationary because it is adding to the demand for goods by putting more money in the system. So any “tapering” is welcome but my opinion is it is not enough to slow inflation.
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