Market Data for year-end 2021:
- S&P 500 Stock Index: 4766, up 26.9%
- Ten-year Treasury Note Yield: 1.51%, up 0.59%
- Gold: $1,829 per ounce, down 3.6%
- Oil: $75 per barrel, up 53%
Risk assets, such as stocks and commodities, surged in 2021 as the combination of continued overwhelming monetary stimulus from the Federal Reserve and a strengthening economy gave investors both the ammunition and confidence to continue pressing the attack in the Great Covid Financial Mania of 2020-22. Defensive assets, such as investment grade bonds and gold, struggled in the fevered environment.
The winds began to change in the fourth quarter, however, principally on account of the Federal Reserve indicating it would accelerate the removal of the “emergency” monetary stimulus that has served as rocket fuel for speculative investments over the past two years. The Fed’s change in tack was forced by price inflation that has proven to be stronger and longer lasting than they anticipated.
Our view is that the heightened inflation we are seeing is temporary in that it is driven by pent up consumer demand from last year’s restrictions and relief checks slamming into global supply chains weakened by the pandemic. These are both dynamics that will likely ease in 2022. Nonetheless, the Fed’s monetary emergency policy had become inappropriate for a normalizing economy, so we agree an acceleration in the removal of stimulus is warranted.
The upshot is that we see risk assets facing a more difficult financial environment in 2022. Expensive high-flying mega-cap growth stocks are particularly at risk, along with more speculative assets such as crypto “currencies” and day trader-driven “meme” stocks. As higher risk assets come under increasing pressure, we expect our more defensively oriented portfolios to make up ground lost during the last two years of financial mania. Few are interested in a 3% annual dividend when high-flying growth stocks are returning ten-times that, at least. However, when those robust returns inevitably turn into losses, the merits of stable return assets will become increasingly apparent to investors.
The number one wild card to our forecast continues to be the path of the pandemic. Our laymen’s viewpoint is that with the passing of the current Omicron wave, Covid will fade as a both a public health and economic issue. There is obviously no certainty to this forecast, so we would not be shocked if we end up being wrong. If the public health situation deteriorates, the likely financial outcome would be a slower withdrawal of monetary stimulus by the Fed and perhaps a resulting second wind for expensive growth-oriented assets.
For 2022, we see US stocks, as represented by the S&P 500 stock index, trading in a range of 4300 to 5200. (It ended 2021 at 4766.) We think a combination of slower economic growth and lower inflation will keep the Ten-year Treasury pinned below 2% (currently 1.51%). Slower economic growth will likely lead to lower commodity prices, including oil, while we see gold little changed.
As always, we appreciate your business and the continued confidence you have placed in us. Please do not hesitate to contact us with any questions or concerns you may have. We wish you a healthy and prosperous 2022.