The US weighs in at 69% of the world equity index and its central bank, until recently, offered $120bn of new dollars extra every month to prop up financial markets. It is the centre of much stock and bond market activity and performance. We have lived through several years of American leadership in the main markets – and enjoyed great returns on US shares in recent years. Can this continue into 2022?
President Joe Biden has had a difficult first year, though not sufficient to derail the equity market. Starting with ratings of around 55% he has slumped to 41% in recent polls, well below most recent Presidents at the end of their first year, except for Donald Trump.
Mr Biden’s hasty withdrawal from Afghanistan, without the knowledge or support of allies, cost him dear. Forty Democrat members of Congress have just written a public letter to the President asking for urgent action to alleviate the starvation and economic damage that the Taliban and western sanctions are creating for Afghan people. Taliban capture of the country after the west was the leading resistance to them for twenty years was a bad outcome.
President pledged in his election campaign to unite his country after the more bruising experience of Donald Trump – only to prolong the battle against the Trump supporters who refused to accept the electoral verdict. His actions have helped unify the Republican party in opposition to several of his central policies.
It is notable that 2021 has seen a surprisingly fast bounce-back by Republicans, despite the excesses of the post-election protests. They have useful leads in early polling for the mid-term elections in late 2022. If nothing alters, the President will lose either or both the Senate and House, making it difficult to pursue the many changes that need legislation or budget approval. Read our recent article on Four views of the world.
Mr Biden has quietly got on with allowing more natural gas to be produced to avoid the shortages and sky-high prices in Europe.
The Biden Presidency is about two main thrusts of policy. He has committed the US to the COP26 and Paris treaty agreements to make faster progress to “net-zero”. He wishes to enact a major spending package, partly paid for by higher taxes on the rich and on companies. The former is not popular with his Republican opponents, who tend to represent the car driving, oil and gas-using, woodstove burning and meat-eating areas of the vast country.
Mr Biden, after cancelling some new pipelines for the oil industry, has quietly got on with allowing more natural gas to be produced to avoid the shortages and sky-high prices in Europe. His spending package has been much scaled down by resistance within his own Democrat Party in the Senate – and still has not been able to pass. Republicans oppose it vigorously, claiming it will end up with too much borrowing, more inflation and too much state interference in the economy.
To paraphrase a comment President Bill Clinton once famously remarked, it is the economy that matters. The economy is slowing a bit, owing to the persistence of Covid-19 and the impact of the new variant. It is also now to be slowed some more by reining in of the very loose monetary policy from the Federal Reserve.
Inflation more intransient?
The worst feature is the high inflation, brought on by the twin stimulus of money printing on a large scale and spending much more than the state collects in tax. The Fed is gradually trying to correct this, losing some confidence in its mantra that the high inflation we are currently experiencing would be short lived. The President’s current planned additional stimulus budget would add a bit to borrowing, though it is primarily paid for by additional taxes on the rich. The Tax Foundation assesses the package as reducing growth by around 0.5%, thanks to the impact of the tax rises.
- 6.8% The annual rate of US CPI inflation in November.
The President suggested in the election that taking a tougher line against the virus would bring cases down, but instead he has been facing continued waves of infection – and a climbing death rate. He has been forced to announce new measures to boost vaccinations and to urge more controls to stop its spread.
It is difficult to see how the US can continue with high rates of monetary and fiscal stimulus. The most likely outcome for 2022 is a measured and modest tightening of money – and eventual Democrat agreement on a reduced package of tax-and-spend measures. In the second half of the year, inflation should be coming down and maybe the worst of new Covid-19 variants will be behind us. This could allow some lifting of mood.
Our base case assumes that the authorities will avert a major sell-off by proceeding cautiously and using the pandemic as a further excuse to prevent greater tightening. It assumes the Republicans will gain more power in the elections – and become more of a restraining force on tax rises and extra spending. The risks are mainly to the downside. We will continue watching out for any signs of inflation embedding in the system, the Fed doing too much – and the virus proving more difficult to contain. It is these factors that would make us more concerned.
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How will America fare in 2022?
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