Wow… just like that the page has turned on 2021 and it’s the start of a new calendar year! As an investment committee, we have been meeting and discussing our plan and strategy for the year ahead. Just when we thought 2020 would take the cake for one of the stranger years we all had ever been through, 2021 decided to give it a run for its money. 2021 also brought with it a great year for the stock market with double digit returns. We remain optimistic for what 2022 has to bring as the economy and market continue to push forward. We also continue to keep a close watch on the Federal Reserve and interest rates, along with COVID and the new variants, and (maybe the most exciting part, ha-ha) taxes.
As we look out to the horizon for 2022 we believe that we could see an increase in volatility in the stock market. This does not mean we will see a recession, but rather more ups and downs in the market when compared to 2021 as news headlines continue to move the market. We believe that news outlets have overblown fears of regulation on big tech and interest rates and that economies around the world will continue to surprise as they have done all year. Will we see corporate earnings at the same level of this year? Probably not, but we do think compared to historic levels they will still be very solid. We are calling this a return to “normal” slower growth compared to last couple of years.
With that said, we did want to share a few thoughts and notes:
- We will be rebalancing our portfolios and making some slight tweaks/adjustments for 2022, based on detailed analysis and conversations with other top investment firms. This will happen starting in mid-January (as a client, you don’t have to do anything, we are on top of it all for you).
- For the majority of the last four years, we have been overweight US stocks compared to international. We do still favor the US over international, but as the tension on the supply chain eases, the vaccine continues to rollout, and the rest of the world continues to open up, we think this can be bullish for international stocks. For this reason, we are evaluating a small allocation increase to the international sector.
- Inflation is here and is likely here to stay. Although we do think that it may settle closer to the 3%-5% range, down from the 6%-7% we are seeing right now. For this reason, we do think that it is prudent to be overweight stocks to bonds. Historically, this has been the best way to fight inflation.
- The current environment has been almost entirely driven by stimulus over the past 2 years. As this continues to be pulled away, this will create the increase in volatility. The timing of all of this remains uncertain. For this reason, we continue to be equal wait between growth and value companies and do not favor one over the other. Both performed well in 2021 and we expect more of the same.
- Cash continues to pay essentially 0% interest and fixed income has struggled. We continue to own a small portion in alternative funds that focus on yield to combat this and are evaluating expanding this allocation heading into next year. We do continue to stress that although bonds are boring, we own some always because of risk management and downside protection during bad markets.
- Our concern for a slow growth 2022 is that with fixed income paying near zero (or even negative slightly as the Fed starts to raise rates), even if stocks are up 10%, a diversified portfolio may struggle to see meaningful gains and be “stunted” by inflation. However, keep in mind there is still record amounts of cash on the sidelines, where the only investment options to make money appear to be stocks and real estate. For that reason alone, gains could surprise us on the upside even in the midst of a slow growth economy.
2022 looks poised to be another year of solid growth for many of the same reasons we saw in 2021 - such as the increasing vaccination rates and new antivirals, and the continued opening of the economy. The President has reiterated that we will not return to the lockdowns of 2020 and we think this also bodes well (I think one sentence about politics is plenty for now 😊.) The US economy has continued to show resilience in the face of one of the most devastating events in recent memory and we don’t see that stopping now.
Until next time, turn off the TV and spend time with loved ones and if there is anything we can do for you, do not hesitate to reach out!
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