Wilmington Trust 2022 Markets Outlook Anticipates Reduced Inflation Despite Labor and Supply Chain Challenges

WILMINGTON, Del., Dec. 15, 2021 /PRNewswire/ -- Wilmington Trust today released its 2022 Capital Markets Forecast (CMF), "Economic Arrhythmia: Businesses adapt to resource disorder," which also includes its latest Business Owners Success Survey. The CMF identifies several key economic risks heading into the new year, including labor and supply chain disruptions, but forecasts that these risks will normalize, inflation will decelerate, and smart technology investments will provide long-term value for businesses.

As part of the CMF, the firm announced its investment positioning for the new year, maintaining a balanced set of exposures across asset classes, sectors, and factors.

The 2022 CMF reports that the evolution of labor markets, supply chain inventories, and inflation will largely define the shape of the global economy and financial markets' performance in 2022 and 2023. Pervasive trends influencing this include:

• Labor shortages -- Wilmington Trust expects this to normalize, but sees risks associated with early retirements, new skill requirements, and greater demand for flexibility.
• Supply chain disruptions -- Companies appear primed to ramp up production, as long as they are able to access resources to help refill inventories.
• Inflation -- Wilmington Trust sees inflation dipping in 2022, as long as there is a decrease in wage pressures and supply chain disruptions.
• Technology -- There is long-term value in savvy tech investments in the cloud and the supply chain for business owners.

"The COVID-19 pandemic has been the most jarring event in a generation and will have permanent impacts on our daily lives. But the further we get from the initial shock, the clearer it becomes that the abrupt nature of the recession and resulting policy response has severed the typical bonds within the economy," said Tony Roth, Chief Investment Officer at Wilmington Trust. "Much like an electrical impulse to the heart, trillions of dollars of stimulus provided support to sustain the consumer and business sectors of the economy through the eye of the storm. But, as we look forward to life after the pandemic, we see that the depth of change that the public health crisis has brought to key pockets of the economy has resulted in an 'economic arrhythmia'."

A Unique Cycle

Multiple factors have aligned to create a phenomenon that Wilmington Trust has coined a "global resource disorder," caused by the labor and supply chain disruptions that have heightened inflation and constricted economic activity. In fact, current inflation is at levels unseen this early in a usual economic recovery, instead reflecting what would typically be seen deep in the deceleration phase of the economic cycle.

Meanwhile, a historical labor market shortage – more than any other economic factor – is accounting for a massive breakdown in the normally well-oiled global supply chain. In previous cycles, the labor market has usually lagged the overall recovery by more than a year.

With job openings at record highs and large corporations raising minimum (and other) wages substantially, the labor markets are in a unique position at this nascent point in the economic recovery. While Wilmington Trust expects the environment to normalize in 2022 -- with companies ready to ramp up production -- several factors still present risks:

• Early Retirements -- Baby Boomers are leaving the workforce quicker than expected, due in part to 401(k) and other investments' performance. Their decision to stay out has created a vacuum where mid-level employees are moved up or hired away by competitors.
• Skills Mismatch -- One of the effects of this economic crisis has been more spending on tech, which has led to a need for workers with specific tech skillsets. However, many workers are not prepared to master new technologies and have found themselves less suited for new jobs until they can get the necessary training.
• YOLO -- Many workers have decided that "You Only Live Once" which has led to some stagnation in the usual places where economies boom in a recovery and change in the way people want to work (i.e., remote work, higher wages).

Wilmington Trust's base case is that inflation pressures will likely subside as we progress towards mid-2022, with workers rejoining the labor force, supply chains running more smoothly and the Federal Reserve beginning a gradual rate-hike cycle near the end of the year.

As a result, the firm has adopted a constructive position on equities, along with a broadly diversified set of other inflation hedges. Wilmington Trust also sees opportunities in dividend equities, particularly in some sectors where valuations are still attractive. International equities also typically offer a higher dividend than their U.S. counterparts, as economies outside of the U.S. have more ground to make up versus pre-COVID levels.

Adaptive Brilliance of Business

The 2022 CMF further highlights that some of the best-positioned companies heading into next year are those using technology investments as a foundation for stronger, more resilient businesses.

Companies able to pivot in the face of new challenges and elevate profit margins to be faster and more resilient, while still making needed tech investments, have proven to be the leaders coming out of the pandemic. At this stage in past economic cycles, technology spending would decline, but in the current situation, technology spending has gone up.

Successful businesses are using, and will increasingly use, technology to increase productivity in three main ways:

• Providing Better Tools -- Technology arms employees with productivity-enhancing tools focused on communication, collaboration, and automation, contributing to higher employee retention.
• Luring New Workers -- Companies are trying to attract talent by raising wages, adding sign-on or referral bonuses, and enhancing benefits. However, they are also embracing remote and flexible work arrangements, and many are instituting a nationalized pay scale, which is a benefit to those moving away from big cities.
• Automation -- Companies are accelerating their use of artificial intelligence (AI), big data, and 5G. Automation such as robotics and AI will dramatically impact workforces in industries such as quick-serve food, retailers, and warehouses. Cloud providers should continue to see robust revenue growth.

Because of these tech upgrades, many sectors of the economy have largely been able to continue business as usual, with workers logging on from home and saving billions of dollars normally spent on things like business travel, entertainment, and conference sponsorships.

Furthermore, persistently low interest rates have made it easier and more attractive for businesses to borrow money to accomplish needed tech upgrades. Companies have been able to issue debt and refinance older, higher-interest debt, giving them more flexibility with current revenue.

Wilmington Trust is optimistic about corporate profitability and the equity market broadly.

Within factors and sectors, Wilmington Trust advocates for exposure to the value factor and cyclical sectors, as valuations remain attractive and should continue to benefit from higher rates and above-trend economic growth. However, the integration of technology into business and consumer activity will continue to accelerate, requiring continued exposure to the growth factor and tech-related sectors over the next three to five years.

2022 Business Owners Success Survey

Wilmington Trust's 2022 Business Owners Success Survey supports this year's CMF report, finding that business owner optimism and confidence in the U.S. economy and their own businesses are almost back to pre-pandemic levels, with 77% saying they are very optimistic about their businesses' prospects -- approaching the 81% who answered the same just before the pandemic.

Additionally, 67% said they expect a year-over-year increase in 2022 revenue, leading them to make investments in both tech and people. More than half (54%) of respondents are investing in tech to enable operations to run more smoothly.

This optimistic outlook on the economy also appears to be leading large businesses to plan for increased capital spending, with more than half (54%) of large business owners saying they would do so in the next six months. However, this optimism has not extended to small business owners, with only 31% of these owners planning to increase their capital spending.

Among all business owners surveyed who increased their capital spending, better than two-thirds (68%) invested in technology so their operations could run more efficiently, and two-thirds also invested in technology for remote work.

However, business owners also acknowledged that they are facing many challenges as they adapt to new business conditions.

They identified supply chain issues (45%) and labor costs (44%) as the largest potential obstacles to revenue growth, while noting that hiring and retraining employees has been a priority and a challenge. While 62% of respondents found it difficult to fill open positions, 83% were still able to make hires for open positions. To fill open roles, business owners had to provide more benefits (45%), pay higher wages (44%), and offer flexible work hours (43%).

To read the reports in full visit https://www.wilmingtontrust.com/cmf-2022

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All investments involve risks, including the possible loss of principal. There is no assurance that any investment strategy will be successful.

Wilmington Trust's Capital Markets Forecast is provided for information purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a recommendation or determination by Wilmington Trust that any investment strategy is suitable for a specific investor. The forecasts presented herein constitute the informed judgments and opinions of Wilmington Trust about likely future capital market performance. Actual events or results may differ from underlying estimates or assumptions, which are subject to various risks and uncertainties.

No assurance can be given as to actual future market results or the results of Wilmington Trust's investment products and strategies. The estimates contained herein constitute Wilmington Trust's judgment as of the date of these materials and are subject to change without notice.

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SOURCE Wilmington Trust