Market perspectives from Wells Fargo Investment Institute
Oct. 12, 2021: “Inflation would be our No. 1 risk to our outlook.” Scott Wren, senior global market strategist for Wells Fargo Investment Institute, discusses inflation concerns, the recovery in the labor market, the increase in oil prices, the outlook for corporate earnings reports, and more in this market update.
The opinions expressed reflect the judgment of the speaker as of Oct. 12, 2021, and are subject to change without notice. The material has been prepared for or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.
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Scott Wren, senior global market strategist, Wells Fargo Investment Institute:
For us, if you look at the U.S. economy, it’s based on consumer spending. That’s about 70% of the economy. And so that means consumers need to have jobs. They need to be confident. They need to have money in their pockets. And that’s what’s really going to drive the labor market, or drive the economy going forward. By the end of 2022, we think the unemployment rate will be down to 4.1%. That’s pretty low. That should be good for consumer spending. And then we also expect some cap ex, some capital expenditures from companies to kick in here as well. But the base of what drives the economy is consumer spending, and that looks good to us going forward.
For us, while the non-farm jobs that were created was less than what was expected, it’s moving in the right direction. And so I think that part of the problem is there’s not as many people participating in the labor force as we think there should be. We think that number will probably go up. That was a weaker than expected number, but as I said, I think we’re seeing some progress. It’s not going to be just a straight line surge. And so that’s an improvement. It will be slow at points like it was last month, but it should also pick up here as we move forward. We expect some better employment numbers in the months ahead.
Well, if we look at the risks that are out there, and there’s a lot of them, inflation would be our No. 1 risk to our outlook. And so inflation looks to us like it’s going to decelerate next year. It will probably be over 4% this year, over 3% next year. So it is going to go up at a slower rate. It’ll probably be even slower than that in 2023. That’s a guess right now, we don’t have numbers out there. But for us, we think inflation is going to decelerate, but that is the biggest risk to our outlook. These supply chain disruptions have been a problem. Wages are going up faster than what we might expect, so inflation is certainly a concern.
That hurts consumers in the pocket. They put gas in their car every week, or at least most people do. It’s like a tax, and it gives them less money to spend on other things. Particularly that’s true for people that are on the lower end of the wage scale. They spend more on food, on gasoline, those types of things. So it’s meaningful. People think about inflation, mostly when they go and put gas in their car and they see that it’s over $3, or if you’re on the West Coast, over $4. So that’s something that gets in consumer’s heads right away. They’re reminded of it every week. And so oil prices are high now. We think they’ll probably stay near these levels, at least in the short term. So consumers need to be prepared to pay these higher gasoline prices, probably at least over the course of the next few quarters.
I think when you look at the supply chain disruptions, they’re not going to clear up any time soon. They’re probably, if you look out 12 months or more until really see some good things happening there. As far as the upcoming holiday shopping season, you know, our advice is you need to buy early while there’s product on the shelves. Because in our opinion, stores are going to run out of goods earlier this year. You’re probably not going to see as many discounts because there’s just not going to be enough supply to meet demand. So get out there, buy early. Get your Christmas list, your holiday shopping list together early. Get it while it’s on the shelves.
I think this week the focus is going to be on these big financials, these big banks. And earnings should be good there. Of course, you’re going to be interested to see what’s loan demand? What are consumers doing? Are business is borrowing? All those kinds of things. So this week it’s about the big financials. But overall earnings for this season for the S&P 500 should be up 25%, 28%, something like that. So not the 90% that we saw in the second quarter. That’s more of an aberration. This is still high relative to what’s likely to happen down the road, but 25% or 28% gains, that’s a big number. And so this is going to be a good earnings season. I think what most people are going to be doing is listening to these outlooks for companies, what they think is going to happen, what’s going on with their supply chain and those types of things. That’s the most important part of this upcoming earnings season.
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