Darrell Cronk, chief investment officer, Wells Fargo Wealth & Investment Management:

When you look at 2022, you know, boy, we’ve enjoyed some of the better growth rates we’ve seen in probably arguably decades. Is that going to, is that going to persist into the next year?

Jay Bryson, chief economist, Wells Fargo Corporate & Investment Bank:

Darrell, I do think it’s going to probably persist. And to put in perspective 2021, when all the records are written on it, you know, and all the data are in, it’s going to be probably 5½% growth.

Cronk:

Wow.

Bryson:

And just to put that into perspective, that would be the strongest year since 1984. We come into 2022 with a fair amount of momentum. We think it will slow over the course of 2022, but we’re still looking at a growth rate roughly 4%. So we think 2022 is going to be a relatively good year.

Cronk:

I think what a lot of people are concerned about is inflation, right? Because, you know, growth on a real basis, right, only matters if inflation’s not spiraling up considerably of which we’ve seen this past year. So how should we think about inflation?

Bryson:

You know, we think that at least in the first quarter, you’re going to be looking at a seven sort of handle.

Cronk:

Wow.

Bryson:

Now we think over time this year, as the supply bottlenecks kind of work themselves out, that will come down. But still we’re looking at an average inflation rate this year of about 5%. And there’s a lot of folks who are listening right now who probably have never experienced a 5% inflation rate over the course of a year.

Cronk:

That’s right. I mean, if you aren’t at least 40, 45, 50 years old, you don’t remember inflation at anywhere close to those levels. So it’s a great point. How should we think about the unemployment rate and the labor market in this next year?

Bryson:

The good news is it’s a seller’s market. So if you’re looking for a job, it’s, it’s pretty easy to get a job right now. The bad news is that a number of people have dropped out of the job market, and that’s keeping it very, very tight. And so what’s happening is it’s pushing up wages, which is good. We all like higher wages. But it can also potentially lead to a cost-push inflation. You know, it could lead to inflation lingering for a long period of time like we saw back in the 1970’s. Now that’s not our view. We don’t think we’re really, we don’t think this is 1975, 1976 in the sense that inflation is going to take off again, but that is the potential for that.

Cronk:

If I just track this back without getting too technical we’ve seen goods inflation, right, inflation in the prices of goods, which often then leads naturally into services inflation, which can lead into wage and labor inflation. It’s kind of a natural continuum. It seems like we’ve seen the goods inflation. We’re on the cusp of seeing maybe some services inflation and maybe wage labor inflation is the story of 2022. Would you agree with that?

Bryson:

Yes. But up to this point it’s largely because of goods because that’s where the supply chain issues have been. But it’s not just goods. So I think the inflation rate is going to remain more elevated than people believe over the course of 2022. And, you know, that sets up the Federal Reserve to potentially respond.

Cronk:

There’s a lot of talk about the Federal Reserve slowing down their purchases of bonds, what they call tapering, and then also beginning to once again raise interest rates, which we haven’t seen since basically 2018. So how should we think about interest rates and what the Fed may do in 2022?

Bryson:

We don’t think the Fed is going to be slamming on the brakes. But they are certainly going to be raising rates to respond to this higher inflation. So let me ask you a question. You know on one hand you’ve got pretty decent growth. It should be good for earnings. But on the other hand, Fed’s hiking rates, that’s usually not real good for the stock market. How does all that play out?

Cronk:

It is the question we’re getting. I mean, coming off the back of basically three years in a row of 20+% returns out of the S&P 500, people are sitting this year, heading into this, year wondering should I be adding to risk or reducing my risk in portfolios? We actually think 2022 can still be a pretty good year. We think price earnings multiples stay relatively stable, meaning they don’t go up or they don’t come down, and therefore stock market returns are going to really be dependent on earnings growth. We think earnings can grow somewhere around lower double-digits. Kind of that 10 to 11% number. We have a $235 EPS number on the S&P 500 this next year. And if that’s the case, we think it could be a decent year. It won’t be another 20+% year. But we do think you want to have exposure. It’s too early to reduce the risk in your portfolios heading into this next year, in our opinion.

Bryson:

And what about fixed income? You know, with the with the Federal Reserve hiking rates, that’s usually not good for, you know, bonds particularly longer term sort of bonds.

Cronk:

In our opinion, on fixed, on your fixed income portfolio, you know, the best offense is a good defense and it’s time to play defense in your fixed income portfolio. And so what do I mean by that? That just means you need to shorten your maturities, or shorten your duration exposure, and you need to go up in credit quality. So you need to make sure that you don’t have some of the more junky, really deep high-yield type exposure or too much of it in the portfolio because we think you know with, to your point, the Fed raising rates and probably some more volatility this next year. It’s not a place where we’d get aggressive right now, and I think that’s a place where you can kind of siphon cash off of and look for other opportunities.

What are the big things that can keep you up at night when you think about the risks as you look out into 2022?

Bryson:

I think there’s three risks that I would, I would point out here. I mean, the first would be just the evolution of COVID. The second risk that potentially could be out there is the Fed. Now, if the Fed were to get really aggressive and really start to stomp on the brakes here, history shows that when they get aggressive, they either slow growth too much or in some cases, put us back into recession. We’ll just have to see how inflation pans out and how the Fed reacts to that. And then the third thing I can think about as it relates to China, China is a very indebted country right now. There’s a lot of property developers who have a lot of debt there. And this is not part of our base case, but if China were to have some sort of debt crisis over there, I don’t think it necessarily puts the United States into a recession. We have very little financial exposure to China, but China is the world’s second largest economy. If the second largest economy is having major sort of issues that’s going to have a spillover effect to the rest of the world. I hear this when I talk to people sometimes: stock market bubble. You know, the stock market is at or near an all-time high. Is there any chance of a stock market bubble this year?

Cronk:

There can always be over extension of the stock market where valuations get, you know, exceed what a fair valuation is. But if earnings can continue to grow, as long as we don’t see, to your good point, the Fed making a policy mistake and over tightening and slamming on the brakes, or just a really strong taper and drop off in demand in the overall economy, we think the likelihood that you’re going to get a big contraction in the stock market is still very small. Now, that doesn’t mean you can’t get your typical five to 10% correction. In fact, we’re probably, candidly, overdue for some of those. But as far as a bubble that bursts and, you know, brings valuations down materially, we just don’t see that as a base case for 2022.

Bryson:

Well, thank you, Darrell, and thank you all for joining us. We hope this has been worthwhile for you, and we wish you the best of luck in 2022.