Wealth Manager Anticipates Uncertain Year

 Following the economically chaotic year brought on by coronavirus in 2020, last year brought overall stability by comparison. But Stephen Davis expects volatility during 2022. 

Davis, managing director of wealth management at the Davis Group at UBS in Westlake Village, oversees $1 billion worth of assets on behalf of his clients. 

He said that the market started off on shaky ground at the dawn of 2021 with the tension created by the Capitol riot and voting certification drama. 

“The election started the year off in a precarious state,” he said.  

As the year continued, “COVID was still in place of being an unknown.” 

This set the tone for the economy and the government’s economic strategy. 

“The only thing known was the Federal Reserve was going to be as accommodative as possible and keep interest rates as low as they could for as long as they could,” Davis said. “They continued to flood the system with dollars and backstop the system.” 

In addition to monetary policy, the government provided an economic backstop in the form of stimulus checks, unemployment benefits and job credits. 

In this environment, corporate earnings for public companies became very robust.  

“Companies were borrowing money at very low interest rates,” Davis said. “They had very strong profit margins. They were buying back stock and increasing dividends. They were going ahead and cutting costs.” 

As the year progressed, interest rates stayed very low.  

“The Federal Reserve kept increasing its balance sheet by buying mortgage-backed securities and treasuries at a record pace,” Davis noted. 

Conditions for growth

Davis said the remote work born from the pandemic has boosted companies and has them re-evaluating their office space needs while also leaning on technology – trends that bode well for 2022.

“A lot of workers started working from home. (Company) margins have been going up,” Davis said.

All of this saw much improvement as 2021 progressed. 

“In the middle of the year, we had a very strong economy,” Davis said. “Over 9 percent for GDP. That’s been the trade-off: strong growth but an uncertain future.” 

 Namely, the pandemic. Before it was the Delta strain, now it’s the Omicron variant that has cast uncertainty going into 2022. There will also be some consternation regarding the mid-term elections in November. 

Davis described the coming year as

bifurcated. 

“We’re going to have the first half of the year strong growth and high inflation,” Davis said, “and that will create a lot of opportunities in cyclical markets. And in the second half, we’ll see lower growth and inflation will subside as supply and demand mismatches get better.” 

Davis also said that the Federal Reserve will raise interest rates two or three times next year. 

“We’ll see inflation come down as we get closer to elections,” he said. 

Davis said he sees his high net-worth clients preparing for retirement. 

“The bigger trend is that they’re not going back to work,” he explained. “The average age of my clients is in their 60s. I’ve had more businesses sell. There’s a lot of businesses that have been around 30 or 40 years that have sold because of the stresses of COVID but also the valuations they’ve been able to get.” 

Beyond Great Recession 

The pandemic situation has been much more difficult to navigate than the Great Recession when Davis formed the Davis Group. 

“It’s much more difficult,” Davis said. “The Great Recession was driven by the housing market and bad decisions and financial institutions that were leveraged.” 

The impact from the 2008-2010 economic strife was much more narrow an area of the economy than that of the coronavirus crisis. 

“You had a pretty good stance we’d come out of that once the banks got capitalized properly and things would get back to normal,” Davis continued. “This one, driven by a disruption from the pandemic, there’s no formula for that. We just don’t know. There was no handbook for this.”  

Looking beyond 2022, Davis anticipates “a generational transfer that will be unprecedented.” 

“We have trillions of dollars that will pass from the older generation to younger generation in the next 15 years,” he said. “That’s not just here, that’s all over the nation.” 

Meanwhile, Davis said he will see that his clients’ allocations “match up for a much more volatile year next year, no doubt about it. … Diversification will be the key next year. You’re going to have to have different portfolios.” 

His advice heading into 2022: “Be prepared for a lot of changes as the year wears on and make sure you’re able to stay in through good and bad times.”