The Big Q: What will happen in Y 2022?
The Big A: My work shows that by June, the inflation rate could approach double digits (it is likely that already). If that is the case, the Fed could act more swiftly and drastically.
That means instead of raising rates by 1/4% 3X this yr, their current forecast, it will be forced to raise rates by a 1/2% or more and raise them more frequently.
If the inflation persists, the Fed may well get yet more aggressive.
And if it gets too aggressive and take too much demand out of the economy, a recession may follow, as was the case in Y 1981. Back then, to stop the double-digit inflation, Fed Chairman Volker was forced to push interest rates to double-digit levels. A severe recession followed.
As I see the scenario today for Y 2022 the Fed begins to raise interest rates in March + 2 more times before yr-end by a 1/4 pt each time, meaning rates will be a bit higher than they are today.
So the US stock market should continue North into 1-H of the yr. electoral history and some early signs in the data suggest that Republicans should do reasonably well in next year’s US midterm elections.
My outlook: On 8 November, mid-term elections will be held for all 435 seats in the House of Representatives and at least 34 in the Senate. 39 state and territorial governorships, as well as lots of state legislative chambers, not to mention local elected offices will be up for grabs too. As to the national outcome, I believe there is a 60% chance that Republicans will win back control of both the House and Senate.
And, a typical pattern in US equity-markets is weakness in 4 months leading up to the November elections, with the S&P 500 swiftly recovering afterwards.
Comment from global financial markets pundit, economist Bruce WD Barren: Paul, a good analysis entering into 2022. Yes, the stock market should continue strong and with a way period before pre-election. Inflation will unfortunately continue and the probability of the November elections seems to reflect current public opinion. Voters want Congressional action but in a positive way, not as it is today under the Federal Give-Away Stimuli and Uncontrollable Spending Mindset, with little if any to their economic impact.
Have a prosperous day, Keep the Faith!