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2022 Investment Outlook Part 2 – Stocks & Bonds

Stocks are priced for perfection. Bonds trade at historically low yields despite 7% inflation. What could go wrong?

As fiscal and monetary support for the economy and markets wane, valuation extremes are in the crosshairs. While the setup for 2022 is…

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Stocks are priced for perfection. Bonds trade at historically low yields despite 7% inflation. What could go wrong?

As fiscal and monetary support for the economy and markets wane, valuation extremes are in the crosshairs. While the setup for 2022 is not looking as friendly as 2021, we must realize the environment can change quickly.

For more on the macroeconomic drivers supporting this forecast, please read Part 1 of our 2022 Investment Outlook – Tailwinds Shift To Headwinds.

2022 Investment Outlook for Stocks

Valuations

As shown below, as we have highlighted in many articles, valuations are at or near record levels. While nothing limits valuations from rising further, we must consider a reversion to the mean in many cases can result in losses of greater than 40%.

pe valuations

Complicating the valuation story is inflation. The graph below shows that historically periods of low inflation or deflation or inflation running greater than 5% are accompanied by CAPE readings of 25 or less. The current reading is 40.

inflation cape valuations

The graph below uses three popular valuation techniques to quantify longer-term future returns. Based on the data, the ten-year outlook is for low single-digit returns at best. The second graph uses CAPE in a similar fashion to show the 20-year outlook is not much better. While our analysis may seem bearish, we reiterate that nothing says valuations cannot continue to stretch further.

tobin cape market cap to gdp
20 year returns valuations

Profit Margins

Corporate profit margins rose to record levels in 2021. Many companies were able to push higher costs onto consumers. At the same time, they were the ultimate beneficiaries of excessive government spending.

As we show below, corporate profits as a percentage of GDP are at the peak of the last decade and well above the 60-year trend leading to the financial crisis. A reversion back to the trend line would result in a 3% decline in profit margins. It is worth considering profit margins tend to revert to and through the trend line. A reversion back to the lows of 2009 and 2002 portends a 50% cut into profit margins. With valuations already at extremes, profit weakness would not support lofty expectations.

corporate profit margins

The Tail Wagging The Dog- Stock Options

This is where the analysis gets tricky. The graph below from Goldman Sachs shows more volume trading in stock options than the underlying stocks. Options are inherently highly leveraged and volatile. As the amount of options grows versus the shares outstanding, options become the tail wagging the dog.

stock options volumes

As we learned over the last two years, dealer hedging of options positions can result in great rallies. Conversely, as we watched in the second half of 2021, the options expiration period was not an investor’s best friend.

Forecasting how options trading might affect stock prices is nearly impossible for a 2022 investment outlook. That said, options have and will continue to influence the market significantly.

One way to track potential volatility is with Gamma flip levels. Gamma helps us understand how dealers hedge options and react by buying or selling the underlying stocks to maintain hedges. SimpleVisor subscribers receive Viking Analytics weekly Gamma Band Update to help them with this task. The graph below from a recent edition shows recommended allocations based on the Gamma of S&P 500 options.

gamma viking analytics

2022 Investment Outlook for Bonds 

The outlook for bonds is equally tricky. If you had asked most bond traders a year ago where they thought bond yields would be if inflation approached 7%, most would have said much higher than current levels.

Inflation and Growth Drive Bond Yields

The graph below from Longview Economics show bond yields are abnormally low given the level of inflation. Per the historical relationship between 10-year UST yields and inflation, the 10-year yield should be 4-7%.

inflation and yields

To help explain this anomaly, we must consider that bond traders tend to look at inflation beyond a year or two when determining value. Low expected inflation or deflation helps justify negative real yields today. Currently, TIPs markets imply 2.48% inflation for the next ten years.    Bond traders must be confident inflation is transitory. If persistently high inflation becomes more likely, bond yields could rise quickly.  

Economic growth over the next ten years is likely to be 2% or lower based on productivity and demographic trends. The Fed’s long-range forecast is 1.6-2.2%. The graph below shows the trends for GDP, and yields have been lower for the last 40 years. Note the declining yield trend is steeper than GDP. Some of this is due to the Fed’s influence on rates.  

gdp and yields

The Fed

As noted in Part 1 of the 2022 Investment outlook, the Fed has been buying nearly 100% of what the Treasury is issuing. To wit- “the Fed has bought nearly $5 trillion of bonds since the pandemic began. In doing so, it came close to absorbing 100% of the net new debt issuance from the government.”

Banks Are Flush With Cash

The graphs below help explain a third important factor keeping yields low. The bottom chart shows deposits at commercial banks are growing much faster than banks are lending money. The banks need to invest deposits, and since they are not lending them out, they frequently invest in U.S. Treasury securities. The upper graph shows the statistically strong correlation (R-squared .76) between the ratio of loans and leases to deposits versus ten-year Treasury yields.  Unless the banks are going to start significantly ramping up lending, which we doubt, expect current trends to continue, thus supporting low yields.

fed banks loans leases deposits

Lower Yields

We think inflation is in the process of peaking. Shortages and supply line problems are slowly diminishing. At the same time, demand is normalizing, and there is little fiscal stimulus on the horizon to boost demand further. We offer a big disclaimer. The current environment is anything but typical. While we think inflation will ease, we are mindful that factors, such as rising wages may keep it elevated.

Yields have trended lower for the past 30 years, following economic growth. We think those trends continue in the year ahead.

Some will counter that if the Fed is not buying bonds who will? We do not know, but as we conclude in Taper is Coming: Got Bonds?: “Currently, yields are close to their cycle highs. If we believe the Fed is nearing tapering, yields could be peaking. Based on prior QE taper experiences, a yield decline of 1% or even more may be in store for the next six months to a year if the Fed is, in fact, on the doorsteps of tapering.”

The graph below from the article shows yields tend to fall after periods of QE and when they are reducing their balance sheet (QT) as circled. QT is currently being discussed by Fed members per the two headlines below.

  • BOSTIC SAYS FED COULD EASILY PULL $1.5 TRILLION OF “EXCESS LIQUIDITY” FROM FINANCIAL SYSTEM, THEN WATCH MARKET REACTION FOR FURTHER BALANCE SHEET REDUCTIONS
  • MESTER: ABLE TO LET BAL SHEET TO RUN DOWN FASTER THAN LAST TIME
fed taper qe qt

An ISM Reading That May Make You Rethink Your Stock/Bond Allocations

In a recent daily Commentary we wrote the following. This quick note provides another reason yields may fall in the coming months.

The ISM Manufacturing Index was below expectations at 58.7, an 11-month low. Notably, the prices paid index fell sharply from 82.4 to 68.2, and supplier delivery times fell to a four-month low. The data provide signals that inflationary pressures are fading, at least for the time being.

The first graph below, from Stouff Capital, shows the strong correlation between the difference of new orders and inventories compared to the ISM Index. The differential leads the ISM index by three months. If the correlation holds up, we should see a steep decline in ISM in the coming three months.

ism manufacturing

The following two graphs show how ISM’s decline may affect bond yields. The first graph below, courtesy of Brett Freeze, shows a statistically strong correlation between nominal ISM (inflation-adjusted) and ten-year UST yields. If the nominal ISM is reversing as it appears, we should expect lower yields. The second graph, courtesy of Mott Capital, charts the correlation of the ISM Prices paid index and inflation expectations. Assuming manufacturing inflation is finally cooling off, inflation expectations should follow. Lower inflation expectations will help reduce bond yields.

ism and yields
ism and tips

Rotations Matter

In 2021, the key to success was understanding when inflationary narratives would dictate market conditions and when deflation narratives drove investors. We do not think 2022 will be as simple.

It is quite possible that value versus growth and low beta versus high beta may be the rotations to key on. As we wrote in An Investment Playbook for Thriving During the Next Market Crash:

“We think it’s likely that value stocks will significantly outperform growth stocks in the event of a sizeable drawdown. Timing the transition from growth to value will be difficult, but such a rotation will likely prove invaluable. You may want to keep the 2000 investment playbook handy.”

Summary

If we learned anything from 2020, the future is far from certain. Not only should we expect the unexpected, but the market reactions to the unexpected may be vastly different than what many assume.

What we discuss above is our best guess as of today. We may be right in some areas and wrong in others. More importantly, we must adjust our expectations as political, economic, and monetary conditions and investor sentiment change.

Navigating 2021 in hindsight was easy. However, a year ago, the outlook was daunting. No doubt 2022 will offer us both risk and rewards. Limiting risks and reaping the rewards will help traverse what offers to be another tricky year.

Maybe, more importantly, relying on trusted economic and market models and not letting psychological biases hinder investment decisions may prove to be the best advice we can offer.

The post 2022 Investment Outlook Part 2 – Stocks & Bonds appeared first on RIA.

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Economics

Peppercomm Named Public Relations Agency of Record for AgriFORCE

Peppercomm Named Public Relations Agency of Record for AgriFORCE
PR Newswire
NEW YORK, Aug. 18, 2022

AgTech innovator taps integrated communications and marketing agency to drive global growth and brand awareness
NEW YORK, Aug. 18, 2022 /PRNewswire…

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Peppercomm Named Public Relations Agency of Record for AgriFORCE

PR Newswire

AgTech innovator taps integrated communications and marketing agency to drive global growth and brand awareness

NEW YORK, Aug. 18, 2022 /PRNewswire/ -- Peppercomm, award-winning, strategic and integrated communications and marketing agency, today announced it has been named global PR agency of record for AgriFORCE Growing Systems Ltd. (NASDAQ: AGRI; AGRIW), an AgTech company dedicated to advancing sustainable cultivation and crop processing to yield more nutritious food with limited environmental impact. AgriFORCE selected Peppercomm following a competitive evaluation of several firms.

Headquartered in Vancouver, British Columbia, AgriFORCE is poised to disrupt the agriculture industry by building a portfolio of proprietary AgTech solutions to help growers achieve higher quality and more sustainably produced crops, alongside branded products and ingredients that unlock superior nutrition for consumers. With an agreement to acquire Delphy Group BV and a binding LOI to acquire Deroose Plants NV recently announced, the company's strategic and holistic approach aims to address key challenges facing the agriculture industry.

"We're pleased to work with a company that can have a real impact on our food and our planet," said Steve Cody, CEO of Peppercomm. "The global pandemic and Russian invasion of Ukraine have significantly affected the food supply chain and accelerated the need for solutions to address these extraordinary challenges. AgriFORCE's IP and expertise are coming to the marketplace at just the right time."

Peppercomm will help AgriFORCE build global brand awareness through an integrated approach that includes strategic counsel, messaging development, thought leadership, earned media and social media, and digital advertising. 

"AgriFORCE is excited to partner with Peppercomm as our agency of record," shared Mauro Pennella, President of AgriFORCE Brands and CMO of AgriFORCE Growing Systems. "Peppercomm has strong experience across agriculture, agtech, and consumer brands, including public companies with multinational operations. We are confident that their tight-knit and senior team, with existing industry and media relationships, can bring to life the vision and purpose of AgriFORCE in the months ahead."

About Peppercomm
Peppercomm is an award-winning strategic, integrated communications and marketing agency headquartered in New York City with offices in San Francisco and London. The firm, which was recently acquired by Ruder Finn, combines 27 award-winning years of expertise serving blue chip and breakout clients with forward-thinking new service offerings and the freshness of a start-up. This unique mix of experience and energy enables the firm to attract and empower teams with a creative edge, drive, and passion for promoting, protecting, and connecting clients in a fast-changing marketplace. Founded in 1995, Peppercomm has received numerous accolades, including Crain's Best Places to Work in NYC 2021, PRWeek's Best Places to Work 2020, the Agency Elite 100, SABRE Award (Integrated Campaign), PRSA Big Apple (2020, 2019 Winner Integrated Campaign), Platinum PR Awards (Media Relations), PRNews Digital Awards (CSR), the Bulldog PR Awards (Media Relations) and PR Daily's Top Agencies of 2022 among others. For more information visit peppercomm.com.

About AgriFORCE
AgriFORCE Growing Systems Ltd. (NASDAQ: AGRI; AGRIW) is an AgTech company focused on the development and acquisition of crop production know-how and intellectual property augmented by advanced AgTech facilities and solutions. Looking to serve the global market, the Company's current focus is on North America, Europe, and Asia. The AgriFORCE vision is to be a leader in delivering plant-based foods and products through advanced and sustainable AgTech solution platforms that make positive change in the world—from seed to table. The AgriFORCE goal: Clean. Green. Better. Additional information about AgriFORCE is available at: agriforcegs.com.

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SOURCE Peppercomm

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Economics

NEARLY HALF OF AMERICANS FEEL THEY CAN’T AFFORD THEIR FORMER LIFESTYLE; THREE-FOURTHS ARE SHIFTING GROCERY PURCHASING BEHAVIORS, FINDS NCSOLUTIONS

NEARLY HALF OF AMERICANS FEEL THEY CAN’T AFFORD THEIR FORMER LIFESTYLE; THREE-FOURTHS ARE SHIFTING GROCERY PURCHASING BEHAVIORS, FINDS NCSOLUTIONS
PR Newswire
NEW YORK, Aug. 18, 2022

66% of consumers are more mindful of spending on groceries85% of …

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NEARLY HALF OF AMERICANS FEEL THEY CAN'T AFFORD THEIR FORMER LIFESTYLE; THREE-FOURTHS ARE SHIFTING GROCERY PURCHASING BEHAVIORS, FINDS NCSOLUTIONS

PR Newswire

  • 66% of consumers are more mindful of spending on groceries
  • 85% of Americans are concerned or very concerned about inflation
  • 58%  believe the cost of living will be more expensive in the coming year
  • 46% of consumers say they're buying fewer non-essentials
  • 43% seek out sales and promotions to afford their favorite brands 

NEW YORK, Aug. 18, 2022 /PRNewswire/ -- Nearly half of Americans (45%) feel like they can't afford their previous lifestyle and 76% of American consumers say their family has changed how they buy food with prices on the rise. In addition, two-thirds (66%) are more mindful of how they are spending their money. These findings are part of a new consumer sentiment survey on inflation commissioned by NCSolutions (NCS), the leading company for improving advertising effectiveness.

Eighty-five percent of Americans are very concerned or extremely concerned about inflation and almost unanimously (93%) they said we're in an inflationary time. On the same economic theme, over half (57%) are concerned about the country's financial situation, while 47% say they're concerned about their family's financial situation. Eight out of 10 or 83% of Americans expect the cost of living will become somewhat more or much more expensive in the coming year. Sixty-five percent of Americans agree with the statement 'my income has not increased as fast at the cost of food, beverage and personal care products.'

"For the second time in a little over two years, consumers are pivoting to new purchasing behaviors at the grocery store," commented Alan Miles, CEO, NCSolutions. "Since the start of the pandemic, they've been swapping their favorite brands for what's available. Today, though, value is the centerpiece more often than availability, consumers are selecting brands and products to stretch their budgets as far as possible. CPG brands that meet customers where they are both in this inflationary moment and as prices ease have the best shot at keeping them for the long-term."

SIX YEARS OF PRICE TRENDS
NCSolutions' proprietary purchase data, which reflects the buying trends of consumers for CPG products, shows an almost 13% price increase on average. In a six-year price trend analysis, we see that price increases in 2022 are pacing at an accelerated rate compared to other years.  The survey findings bear this out with 58% of consumers believing the cost of living will be much more expensive in the coming year and 71% feeling the U.S. economy is declining. 

Six-year Inflation Trend

 

Percentage Inflation Change Year-Over-Year

On a consumer packaged goods category level, there are wide variations in percentage increases.

CONSUMERS REACT TO THE PINCH
Compared to one year ago, six in 10 Americans believe CPG product packaging has gotten smaller but costs the same. Consumers still feel the strain of supply chain issues as 69% say there are fewer items of the same product on the shelves. Thirty-six percent of Americans said there is less variety of  brands available on the shelf today compared with one year ago.

Over half (53%) of American consumers say they find basic food staples more expensive; 40% believe a recession will occur in 2023. For almost half of consumers (46%), this means buying fewer non-essential items on the food aisle, or for 43%, it means buying only the essentials.  Seventy-one percent of Americans say the increased price of groceries is straining their savings. For other American consumers, increased prices on the grocery aisle mean seeking out less expensive brands (45%).  Other ways consumers are coping with the increased price of groceries are loading up the pantry (27%) or freezer (26%) or shopping closer to home (24%).

When it comes to consumers' preferred brands, they have to make tough choices. Sixty percent of consumers seek less expensive alternatives when their favorite brands reach a price beyond their budget. Forty-six percent of consumers plan to go without their favorite brands, and 43% of consumers look for sales to offset the cost. In the survey, respondents could select multiple ways they react.

June 2021 vs. June 2022: Inflation Increases by category

"Though it may be tempting to pull back on advertising, a more effective strategy is to recognize and respond to consumer 'stress-flation.' Brands have an opportunity now to build loyalty and attract new customers with empathetic marketing," said Leslie Wood, Chief Research Officer, NCSolutions. "We're heading into a period of heavy CPG purchasing moments, such as back to school and the approaching holidays. Compelling, well-targeted advertising is a proven strategy for increasing brand equity and sales both in the short- and long-term."

CONSUMER PRIORITIES
Respondents were asked, "When shopping for groceries, which products are most important." The majority ranked:

  1. Affordable products that provide a clear value for my money 
  2. Finding food products that feed their families for several meals
  3. Products they know their families will enjoy eating

ABOUT THE CONSUMER SURVEY: The online survey of 2,141 respondents was fielded from June 17- 20, 2022.  Responses presented in this survey were weighted by location, education, income and other demographics to be representative of the overall population. To read more about the findings, you can download the full report

ABOUT NCS
NCSolutions makes advertising work better. Our unrivaled data resources powered by leading providers combine with scientific rigor and leading-edge technology to empower the CPG ecosystem to create and deliver more effective advertising. With NCS's proven approach, brands achieve continuous optimization everywhere ads appear through purchase-based audience targeting and sales measurement solutions that have impacted billions in media spend for our customers. NCS is a joint venture company with  Nielsen as the majority owner. 

View original content to download multimedia:https://www.prnewswire.com/news-releases/nearly-half-of-americans-feel-they-cant-afford-their-former-lifestyle-three-fourths-are-shifting-grocery-purchasing-behaviors-finds-ncsolutions-301608518.html

SOURCE NCSolutions

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Economics

Legal Services Sourcing and Procurement Market by 2025| COVID-19 Impact & Recovery Analysis | SpendEdge

Legal Services Sourcing and Procurement Market by 2025| COVID-19 Impact & Recovery Analysis | SpendEdge
PR Newswire
NEW YORK, Aug. 18, 2022

NEW YORK, Aug. 18, 2022 /PRNewswire/ — The “Legal Services Market” report has been added to SpendEdge’s…

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Legal Services Sourcing and Procurement Market by 2025| COVID-19 Impact & Recovery Analysis | SpendEdge

PR Newswire

NEW YORK, Aug. 18, 2022 /PRNewswire/ -- The "Legal Services Market" report has been added to SpendEdge's library which is trusted by more than 100 CPOs and 500 category managers who use our insights daily.

The Legal Services market is poised to grow by USD 187.38 Billion, progressing at a CAGR of almost 3.64% during the forecast period

https://spendedge.com/sample-report/process-instrumentation-sourcing-and-procurement-intelligence-report

Key Highlights Offered in the Report:

  • Information on how to identify strategic and tactical negotiation levels that will help achieve the best prices.
  • Gain information on relevant pricing levels, and a detailed explanation of the pros and cons of prevalent pricing models.
  • Methods to help engage with the right suppliers and discover KPIs to evaluate incumbent suppliers.

Fetch actionable market insights on the post-COVID-19 impact on each product and service segment.

Some of the Top Legal Services suppliers listed in this report:

This Legal Services procurement intelligence report has enlisted the top suppliers and their cost structures, SLA terms, best selection criteria, and negotiation strategies.

  • Latham and Watkins
  • Allen and Overy
  • Hogan Lovells

Fetch actionable market insights on the post-COVID-19 impact on each product and service segment:

https://spendedge.com/sample-report/process-instrumentation-sourcing-and-procurement-intelligence-report

Top Selling Report:

  1. Asset Recovery Services - Forecast and AnalysisThe asset recovery services will grow at a CAGR of 9.49% during 2021-2025. Asia Asset Recovery Pte Ltd., TES-Amm Singapore Pte Ltd., and Iron Mountain Inc. are among the prominent suppliers in the asset recovery services market. Click the above link to download the free sample of this report.
  2. Vulnerability Management Sourcing and Procurement ReportVulnerability Management Procurement Market, prices will increase by 4%-6% during the forecast period and suppliers will have moderate bargaining power in this market. Click the above link to download the free sample of this report.
  3. Business Process Outsourcing Services- Sourcing and Procurement Intelligence ReportThis report offers key advisory and intelligence to help buyers identify and shortlist the most suitable suppliers for their Legal Services. Click the above link to download the free sample of this report.

To access the definite purchasing guide on the Legal Services that answers all your key questions on price trends and analysis:

  • Am I paying/getting the right prices? Is my Legal Services TCO (total cost of ownership) favorable?
  • How is the price forecast expected to change? What is driving the current and future price changes?
  • Which pricing models offer the most rewarding opportunities?

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Table of Content

  • Executive Summary
  • Market Insights
  • Category Pricing Insights
  • Cost-saving Opportunities
  • Best Practices
  • Category Ecosystem
  • Category Management Strategy
  • Category Management Enablers
  • Suppliers Selection
  • Suppliers under Coverage
  • US Market Insights
  • Category scope
  • Appendix

About SpendEdge:

SpendEdge shares your passion for driving sourcing and procurement excellence. We are the preferred procurement market intelligence partner for 120+ Fortune 500 firms and other leading companies across numerous industries. Our strength lies in delivering robust, real-time procurement market intelligence reports and solutions.

Contacts:

SpendEdge
Anirban Choudhury
Marketing Manager
Ph No:
+1 (872) 206-9340
https://www.spendedge.com/contact-us

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SOURCE SpendEdge

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