“Life is one darn thing after another.” Calvin Coolidge
With 2021 behind us, and an increasing number of adults lining up for their booster vaccines in what could become a biannual custom, so have investors become increasingly accustomed with the economic boosters of cheap money and “stimulus” spending by Congress. It is hard to argue that under such a benevolent environment, asset prices can’t go anywhere but up. The S&P 500 posted a roughly 30% plus return in 2021, with solid performance from all market sectors, and with earnings increasing at a faster rate (north of 40%) the stock market’s valuation actually contracted a bit. The only major asset classes to post negative returns were gold and fixed income.
For 2022, the known “knowns” include: 1) inflation is stickier than advertised, 2) short term interest rates will start rising in the spring, 3) long term rates will be allowed to start finding their own market level once the Federal Reserve’s bond-buying program sunsets in the spring, 4) corporate earnings will grow near double digits, 5) risk-asset values are starting the year at lofty levels, 6) as the year progresses every government policy will be viewed through the lens of election-year politics. The known “unknowns” include: 1) does labor wage growth keep pace with inflation making for a feedback loop that further pushed inflation higher, 2) do long term interest rates start reflecting a positive real interest rate (yield minus inflation) or do they remain negative, even as yields increase, 3) do asset valuations remain lofty due to lack of investable alternatives, 4) does the rapid growth of Omicron cases cause further supply chain disruptions that either slow down the consumer and/or pressure inflation upwards once again, 5) do geopolitical events (Taiwan, Ukraine, other) throw a monkey wrench in this placid stable as she goes outlook?
In surveying the investment landscape, the market consensus is for the S&P 500 to post a high single digit return, close enough to its historic average annual performance, yet well below the impressive gains of the last three years. Certainly, in a year that could and should see an increase in market interest rates, such an equity return may seem even disappointing. But, considering the downward pressure on fixed income assets as rates rise, once again it will be hard for investors to ignore risk-based assets such as equities. We do believe though, that the market’s rotation out of the go-go growth stocks will continue, and that companies entering 2022 with more reasonable valuations are likely to outperform. To put it another way, we expect value to outperform growth. Finally, in a year that the Fed is more prone to “raise” than to “bailout”, market selloffs may be more tolerated by the Fed, and could therefore prove to be more frequent and deeper, prior to becoming a buying opportunity.
We appreciate your support, and always welcome your comments and feedback.
Dimitri Triantafyllides, CFA