Page 41 - Investment Advisor June 2022

straints, and other margin pressures,” economic news … was the negative GDP He predicted: “We are likely to see
Siegel said. He pointed to the April sell- [in Q1] that is raising questions about further labor cost pressures with an
offs in Amazon, Alphabet (Google’s par- health of our economy and whether the economy at full employment and very
ent) and Apple — which “followed the Fed starts hiking rates right as we are little labor market slack.”
halving in prices we had in Facebook about to enter a recession,” Siegel said.
and Netflix,” he said. The street had consensus GDP growth 7. There are reasons to be upbeat and
Several of those popular FAANG of +1%, while the forecasting services downbeat about inflation for the rest
(Facebook, Amazon, Apple, Netflix that Siegel said he watches most closely of 2022.
and Google) tech stocks and “darlings had -0.6%. “The actual reading came in “The good news for inflation is we did
of the growth era are now selling at at -1.4% and what caused the negative have the second consecutive month
P/E discounts to the broader market,” reading was a sharp unexpected down- of moderated M2 money supply
he noted. ward move in the trade balance,” Siegel growth — this latest reading came in at
But he said there’s a silver lining: noted. “This trade balance is a very vola- 4.5%, which translates to inflation lev-
“These lower and more reasonable valu- tile number and [it] should be reminded els of 2% or less in my models,” Siegel
ations might help prevent the S&P from this is a preliminary GDP release that said. But he added: “the year over year
falling further into an official bear mar- could be revised substantially higher,” increase is over 10%, and we need these
ket like the Nasdaq.” he added. lower M2 money supply readings to
Doll believes that stocks will end come in persistently.”
the year without making the gains that 4. There won’t be two straight quarters While the money supply is now 25%
many economic experts expect. He of GDP declines. above trend, inflation has only been
predicted stocks will experience their “The outlook for second quarter GDP is about 6-7% above trend, he noted. “This
first 10% correction since the pandemic much better and currently forecasted at means there is still 18% more inflation
started and fail to make the gains that +2%,” Siegel said. “Yet the first quarter in the pipeline (above the normal 2%
many investors had been hoping for. negative GDP reading will be a tricky rate) that should manifest over coming
Further, he believes cyclical, value and political issue for” Federal Reserve 3-4 years,” he added. “We have to start
small stocks will do well, outperforming Chair Jerome Powell, he added. reducing these pressures and the first
defensive, growth and large stocks. “I am sure reporters will ask Powell consecutive 2 months of lower growth
He also predicts that financial and how he can hike rates 50 basis points in M2 is a positive in that regard.”
energy stocks will outperform utili- with fears of a recession and this declin- Doll still expects that inflation will
ties and communication services. And ing first quarter GDP. Yet hiking 50 basis peak in the current quarter. The 6%-8%
though financials “started the year OK,” points plus a string of 50 basis point inflation we’re seeing now will decline
he said, “recession concerns caused hikes at upcoming meetings is required after “some supply line-related inflation
[them] to struggle.” to combat our elevated inflation levels,” variables … calm down to some degree,”
Meanwhile, Doll said, the “worst Siegel explained. he predicted.
performer year to date, communication He added: “The Fed started commu- He expects inflation to decline to
services, is one of the areas we did not nicating intentions to get to a neutral 4%-5% by the end of 2022. Although an
like” heading into 2022. That and utili- policy rate as quickly as possible and I improvement over today, that will still
ties, which have done relatively well so don’t see the GDP report changing that be higher than the Federal Reserve’s 2%
far this year, are underweighted areas, dynamic.” target, he added.
he added.
For only the second year of the past 6. There will probably be additional 8. Ten-year Treasurys will see a year of
decade, international stocks will out- labor cost pressures. negative returns.
perform the U.S., Doll predicted, but The U.S. unemployment rate continues Doll predicted that, for the first time
for European stocks to fare better, the to be low. But Siegel noted: “We also had since 1959, 10-year Treasurys will pro-
Russia-Ukraine war would have to end, an employment cost index that came out vide a second-straight year of negative
he added. higher than expected — I have talked returns.
about how labor costs are a lagging He also noted that after a 60-plus year
3. The final Q1 GDP figure may end up inflation indicator because employees low in 2021, federal interest expense as
not being negative. often have fixed contracts that are re- a percentage of revenue begins a long-
In addition to April’s earnings, the “big negotiated on annual basis.” term move higher.

JUNE 2022 INVESTMENT ADVISOR 39