Quarterly Commentary – December 2021

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The fourth quarter of 2021 saw the US Equity Market continue to climb, and despite a couple of relatively minor setbacks, managed to close at new highs. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar-to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. Year to date for 2021, the S&P 500 was up 28.7%. The Dow Jones Industrial Average was up 20.9%. The Nasdaq Composite Index was up 22.2%. The Russell 2000 Index was up 14.8%. International equities as represented by the MSCI AC World Ex U.S. Index were up 7.8%. The MSCI Emerging Markets Index was down 2.5%. Fixed Income as represented by the Bloomberg Barclays Aggregate Bond Index ended down 1.5% for the year.
Late November and mid-December, we experienced a couple of minor selloffs prompted primarily by concerns over inflation, the Federal Reserve shifting gears on tapering its bond purchase program and of course concerns over the latest Covid mutation: Omicron.

Inflation has been driven in large part by strong demand along with supply shortages and supply chain issues. Although these issues may linger through next year, using the past a guide, shortages are usually temporary and can rapidly lead to gluts which can create other kinds of risks. Regarding the Federal Reserve position, there was an admission that the word ‘transitory’ which had been used to describe inflation was no longer a fitting description. Much of the inflation is driven by not only supply and demand conditions, but labor tightness and supply chain issues that the Federal Reserve cannot fix with monetary policy. The market expects the Fed will have to raise rates sooner than what is implied by its own projections and more countries are shifting towards a tightening stance globally. In the immediate, the Fed has started tapering the amount of bond purchases and indicated that they may speed up their timeline. Is inflation a concern? Certainly, however, relative to prior inflationary events, this one is unique and does not involve a crisis of confidence.

The labor markets have been disrupted and labor force participation remains below pre-pandemic levels. The problem is more significant in the US, where early retirement has caused a significant number of people to leave the labor force. In addition, many families have shifted to a single earner. Many have been able to rely on added government support as well. The start of many new businesses has taken place during the pandemic. The result is that there are shortages in key industries, particularly in those where the average age of the workforce pre-pandemic was relatively high. Jobs can appear plentiful, but it is proving challenging to get them filled given the displacement that has taken place.
On the Covid front, at this stage we are learning new things every day about the Omicron transmissibility and the hospitalization risk. Equity markets are still trying to fully assess its potential impact on the economy and thus far, after some initial reaction, the equity markets seem unphased that this will have a major impact on the economy and future company earnings. It appears that we are in a much better shape overall than last year relative to dealing with the unknown this virus presents, with a little experience under our belt, some partially effective vaccines and with the emerging availability of therapeutics to treat Covid outside of hospitals. The Covid story no longer seems to dominate the uncertainty about economies and stock markets as we close 2021. There will continue to be winners and losers as we have seen this year and things can change quickly as we’ve learned.

On a positive note, during the pandemic excess savings were built up to extremely high levels. With a return to normal, the accumulation of a relatively high percentage of the disposable income remains available. If confidence returns full force, that can represent a significant boost to aggregate demand which is good, to the extent that supply issues get resolved. We think that overall, US Equities continue to be one of the most attractive areas to be, certainly relative to bonds. Valuations are not stretched by historical standards when viewed through the lens of equity risk premiums, a metric that considers the prevailing interest rate backdrop which remains low. We have seen strong resiliency from the equity markets in 2021 and barring any major event to derail that, it should continue. If we do get a correction, just keep in mind that from time to time they are a healthy part of the process, and it has always paid off to stay the course or add funds when possible. A simple glance in the rearview mirror will make that obvious.

We wish you a Happy New Year and are thankful for the opportunity to serve you. Stay safe out there!