Winter 2022 Commentary

January 13, 2022


The quarter began with the S&P 500 returning 7.0% for the month of October. November began positive, but a mid‐month reversal saw the index fall ‐0.7% for the month. Then, in what has become a normal seesaw fashion, the market reversed again in December, rising 4.5% and capping off a very impressive return of 11.0% for the quarter.

The 4th quarter finished what turned out to be a very good year. The gain for 2021 for the S&P 500 was a robust 28.7%. This follows returns of 31.5% in 2019 and 18.4% in 2020. As you can see in the chart below, the index has nearly doubled over the past three years. This is a remarkable gain, especially given the backdrop of the ongoing global COVID‐19 pandemic.

*This graph is not intended to recommend any investment or investment activity.

International stocks posted a gain of 11.3% for the year, but again trailed U.S. stocks for the fourth year in a row. Rising interest rates resulted in a decline in the bond market for the year with the Bloomberg Barclay’s Aggregate Bond Index falling ‐1.5%.

For the year, the dominant concern for investors remained the COVID‐19 pandemic. When the virus first emerged nearly 2 years ago, the widespread expectation was that it would clear up in a short period and that the world would quickly return to normal. It is now apparent that the normal we knew before the pandemic remains far out of reach. There has been wave after wave of rising infections, hospitalizations, and deaths. And as expected, the virus has mutated several times into new strains. This year, the Delta and Omicron strains have spread like wildfire and have caused many disruptions in the global economy.

However, the two primary issues in dealing with the COVID crisis are much different now than they were in early‐2020. First and foremost, vaccines have been developed and have proven quite effective in fighting infection and serious illness. We have also learned by trial and error which precautions we can take to reduce the risks of spreading the disease. It is unlikely we will again see the widespread shutdowns that occurred in the initial response to the virus. Instead, the mindset of policy makers and society at‐large is shifting to one of learning to live with a disease that has become as ubiquitous as the seasonal flu and other more common diseases.

An unexpected result of the pandemic has been an upward spike in inflation. The most recent reading of the Consumer Price Index (CPI) showed a 7.0% increase over last year. This is much higher than the ~2% average reading over the past decade. Many attribute the rise in inflation to the record amounts of stimulus provided by the government and Federal Reserve to soften the economic blow of the COVID crisis. Reductions of the labor force, which can create wage inflation, have occurred as fear of the virus kept workers home, and the swift rise in the stock market has swelled investment accounts, helping older workers retire earlier than planned. There have also been global shutdowns that have greatly disrupted supply chains, manufacturing, and shipping. These are among the many factors that have combined to create inflationary pressure. However, most strategists remain optimistic that these factors will abate soon and that inflation will moderate in the coming year.

To combat the threat of rising inflation, the Fed has signaled their intent to raise interest rates and shrink their balance sheet. This has caused bond yields to rise, resulting in a negative return for the year in the bond market. The outlook for bonds remains choppy as the Fed is expected to announce 2‐4 interest rate increases in the coming 12‐18 months.

As many predicted, the narrowest possible majority in the senate for Democrats has resulted in much difficulty in creating new tax and spending legislation by the new administration. While the infrastructure bill amounting to $1.2 trillion has passed, President Biden’s “Build Back Better” plan has met stiff opposition by party moderates and continues to languish in debate. If passed, the plan would introduce broad social spending and higher taxes on the wealthy. With the mid‐term elections fast approaching, the fate of the Build Back Better plan remains highly uncertain.

As expected, the economy experienced a sharp rebound this year. GDP is estimated to have grown about 6‐7%, despite the fits and starts caused by the ongoing COVID crisis. Growth is expected to moderate to 4% in 2022 and resume a more normal pattern into the future.

The amazing rise of the stock market in recent years has caused many to express their concerns that the market has become overvalued, or has risen “too far, too fast.” As was mentioned previously, the S&P 500 has nearly doubled in the past three years, and has risen seven ‐fold since the 2009 lows following the global financial crisis. While it’s undeniable that the rise in the market has been impressive, it’s important to remember that long‐term (or secular) bull markets can last for a very long time.

The chart below compares the secular bull market of the 70’s‐90’s (red line) to the current bull market (blue line). In both cases, we’ve begun the measurement periods at the market peaks before the severe declines that preceded both bull markets highlighted here. In the case of the period between 1973‐2000, $100 invested the S&P 500 in 1973 grew to $3,400 by the year 2000, posting an average gain of 13.8% per year. You can see in the chart that the current bull market is tracking a very similar course. With nearly identical results over the first 13 years. We can’t predict whether or not the current bull cycle will continue as long as the previous bull run, but at this point, there aren’t sufficient reasons to doubt that it will. In both cases, innovation and capital seeking opportunities have resulted in robust growth in the economy and corporate profits.

*This graph is not intended to recommend any investment or investment activity.

For the coming year, we expect the market to continue to rise, but near‐term activity to remain choppy. We expect COVID‐19 concerns to eventually subside and the supply chain bottlenecks to normalize. This should lead to the long‐awaited liftoff in the economy which will have a positive effect on corporate earnings, and by extension, the stock market. But as we’ve learned over the past two years, we must always be prepared for the unexpected.

Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience. Lastly, don’t keep us a secret. If you know someone who would like help planning for their financial future, we will be pleased to speak with them to see if we can assist.