“As we enter into 2022,” — when you say that out loud it sounds a lot like “2020-2.”
Don’t be alarmed, I believe things are moving in a positive direction. I have laid out trends that I see as important factors moving into the new year. I am not going to prognosticate about where the stock market is going, but rather about what I feel is going to be the most important factors impacting supply houses across the country.
- Inflation should be deemed non-transitory;
- Prices will most likely continue to rise, increasing sales but also cost of goods sold; as a result, keeping margins consistent;
- The U.S. has spent $4 trillion dollars responding to the pandemic, while people were trapped in their homes thus creating an extraordinarily positive household savings for Americans; and
- COVID subsidies have helped the balance sheets of both individuals and business owners.
- As the pandemic fades, consumers should redirect spending from goods towards services. Supply chain stresses should alleviate; trade and portfolio flows suggest that the secular force of globalization that has kept goods’ inflation in check for two decades is unlikely to fully reverse; and
- Supply houses will most likely spend more dollars on e-commerce technologies and “touchless” interfaces or will be forced to refocus the planning for the next pandemic.
Beginning of the end of COVID
- The transition from pandemic panic to the easing of fears will occur;
- We will look at this as a natural disaster, rather than a recession;
- Scientists have commented that the Omicron variant is much more communicable, but has shown to be less severe effects. This will lead to the beginning of herd immunity. The general population will become fatigued by the restraints on their personal and business lives. Bill Ackman, a leading Hedge Fund manager, believes that Omicron will be a catalyst for the market;
- COVID will begin to be viewed more like the common flu; and
- I expect the virus will continue to have a diminishing impact on economies and markets, even if certain sectors remain vulnerable to an increase in COVID cases.
Manufacturing will come home to the U.S.
- Biden’s physical and human infrastructure bills plan to allocate trillions of dollars in infrastructure spending, high-speed internet systems and clean energy, and also fund other priorities such as child care and healthcare; and
- If the U.S. learned anything from the pandemic, it is to be less reliant on goods imported from foreign countries. The cost of shipping, and the long wait times at key ports will lead to a lot of manufacturing jobs coming home, and thus becoming a driver for supply houses for new builds.
- Developed markets have begun steps toward tightening monetary policy and raising interest rates. I believe that the U.S. Fed will follow the lead to try to compete against inflation;
- Historically, this has led to a reduction in multiples because of the correlation between interest rates and multiples. When interest rates rise, typically multiples fall; and
- In the immediate near term, I do not think multiples will be reduced but if interest rates stay high, then multiples will eventually be reduced as cheap money retreats.
- I expect the U.S. labor supply to increase as health risks recede. Further, the ~2.7 million workers who were better off collecting augmented unemployment benefits instead of working will probably seek jobs in the months ahead;
- Strong wage growth ought to entice some of the ~2 million working-age individuals who dropped out of the labor force to step back in; and
- Supply houses will have more workers in the workforce but the demand for higher wages will prevail for current and prospective employees.
- There will be a major uptick in corporate and government spending. Current Corporate Balance Sheets are swelling with cash, and the Democratic-led House will push for spending as they push through Joe Biden’s “Build Back Better “plan; and
- Unions will be rewarded with contracts to build America, which will create record years for supply houses as resources will be in demand.
- Although I am predicting a red wave in the House of Representatives, I feel the Senate map is particularly challenging for Republicans and the Senate will remain in Democrat control; and
- Many popular Republicans are retiring (Pat Toomey, Rob Portman, Richard Burr), while the most vulnerable Democrats are running in states that Joe Biden won (New Hampshire, Nevada, Arizona and Georgia).
- In 2022, as the U.S. and European economies march further into mid-cycle, I expect a strong growth environment characterized by higher inflation than investors saw in the previous cycle; and
- The larger national supply houses have been active in their acquisition strategy. I believe this trend will continue as owners continue to age, vendors want to narrow their focus, and money continues to be inexpensive.
Allocation of cost of goods sold
- In recent years, innovations emerged in e-commerce, tech hardware and cloud computing. E-commerce spending is 20% higher than it was before the pandemic, and global spending on cybersecurity for cloud computing grew at a 40% pace in 2021. All benefited from the fact that people spent more time online; and
- Cloud computing continues to accelerate. Before the pandemic, 20%–30% of work was done in the cloud. Executives thought it would take ten years for that share to grow to 80%. Now, it could only take three.
To wrap up my predictions, I hope I am right about all of the positive predictions, and wrong about the negative ones. Either way, I will review my predictions next December to hold myself accountable! Good luck in 2022 and I hope nothing but the best for you, your family and your business!
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