2022 New Year Market Perspective

Summary Video: click here (<4 minutes)

Happy New Year! 2021 flashed by as time resumed its flying pace. Throughout the ups and downs of the economy and markets last year, the ride concluded with numerous positive indicators. Household balance sheets are in historically strong shape thanks to a reduction of consumer debt during the pandemic and stimulus payments. As suggested in our last commentary, unemployment plummeted in Q4, with new claims at a 50-year low. Further impacting households, companies have earmarked nearly 4% of operating capital for wage increases this year. And, global equity markets provided positive returns for those with the risk appetite. However, in a twist of irony, as of December 2021, consumer confidence, as measured by the ‘Index of Consumer Sentiment’ published by the University of Michigan, is lower than it was during the lockdowns in 2020 (12/21: 70.6, 04/20: 71.8). In short, people are back to work, with less debt, making more money, spending more, and… they’re very stressed. As 2022 begins, we stand optimistic among a sea of pessimists.

Our core themes for 2022 include some reiterations from years past: inflation, the never-ending economic tug of war, digitization of currency and money systems, and global debt. Inflation is a primary economic driver for now as the culprit behind the lack of consumer confidence (the non economic driver remains Covid). There is always a tug of war between economic data points, risk and return, optimists and pessimists, so focusing on the data is necessary to make a balanced assessment.

• 2021 was steeped in worry, but ended on a (mostly) positive note.
  • U.S. Stocks (Russell 3000): +9.28% Q4, +25.66% YTD
  • U.S. Small Cap (Russell 2000): +2.14% Q4, +14.82%YTD
  • International Stocks (MSCI ex US Index): +3.14% Q4, +12.62% YTD
  • U.S. Bonds (Bloomberg Barclays Aggregate Index): +0.01% Q4, -1.54%YTD
  • Emerging Market Stocks (MSCI Emerging Index): -1.31%Q4, -2.54% YTD
• Inflation landed at 7% for 2021, a level not seen since the 1980s. Without food and energy, two volatile data points, the reading landed at 5.5%. It’s still a higher rate than markets AND households prefer. But, inflation is a finicky data point, affecting one family differently than another. Households living paycheck to paycheck are affected a lot, while others hardly notice. We expect inflation to persist, but not at this rate. As supply chains ease up and Covid shifts from a state of pandemic to endemic, some key contributors to the high inflation rate will resolve (energy, oil, vehicles). We always root for ‘Goldilocks’ inflation – not too high, not to low. Remember, tempered inflation isn’t a bad thing…
• Moderate inflation can be a positive economic input; it contributes to federal debt reduction and normalized interest rates. We’ve been spoiled since 1990 with an average inflation rate of 2.68%. Since 1960, the average is 3.68%, and the peak was north of 16% in the 1980s before Paul Volcker hit the great inflation reset button and overhauled the Federal Reserve’s approach (‘the Fed’). Our debt to GDP ratio is on track to drop down below 120% from a peak of 135% in less than a year, in part due to a jump in GDP (which includes inflationary increases). Furthermore, the Federal Reserve is more equipped to fight inflation than deflation. One key tool is the Fed Funds Rate—the overnight interest rate set by the Federal Reserve in which depository institutions lend funds to one another—and a gradual increase in the rate provides a cushion for future rate reductions to fight the inevitable next crisis or recession. Plus, fixed income households would benefit from higher interest payments drawn from CDs and bonds.
• U.S. GDP estimates for Q4 2021 are 6.5-7%, and the International Monetary Fund estimates 4.9% global growth in 2022. U.S. corporate earnings produced 20% growth three quarters in a row, and manufacturing indices are signaling expansion. Despite multiple challenges including supply chain issues, covid disruptions, and inflation, companies performed extremely well in 2021. These challenges will persist into 2022, and increasing interest rates will add to the complexity, but strategies and tactics developed last year have set the stage for continued growth.
• Ditch the crystal ball; you’ll end up walking on shards of glass! Yes, the S&P 500® hit another high in 2021, but remember that each time the index reached new highs from 1926-2020, the following year’s return averaged 13.9%. Why should 2022 be an outlier?

In an industry that constantly reminds us that ‘Past performance does not guarantee future results', there is one guarantee we feel confident in making: 2022 and years to follow will bring new challenges. Understanding the context of these challenges, and executing your plan based on your family’s headlines remain our unwavering focus. With this in mind, don’t forget to keep us updated if you or your family has any changes that might affect your plan! It is our honor to be a part of your team and to celebrate as you experience the richness of life!

Sources: Dimensional.com, BLS.gov. Fred.com, Zacks Investment Management “Consumer Confidence” December 2021, Zacks Investment Management “Are we returning to 1970’s style inflation” December 2021, Vanguard 2022 Outlook, BlackRock 2022 Outlook, LSA Portfolio Analytics 2022 Outlook

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Index Disclosures:
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Index Definitions:
Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.

S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI Ex-US: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States. The MSCI Ex-US index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charge.

MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charge.

The Russell 2000 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 3000 index is an unmanaged index of 3000 companies in the United States. The Russell 3000 Index is used as a representative sample of the United States economy. The Russell 3000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

[1] Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

[2] Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.