Market Update Q4 2021

The 4th quarter began with markets bottoming out in October. The concerns of Evergrande having a global impact were put to rest by the Chinese government’s intervention. The Federal Reserve took a hawkish tone in the battle to deal with what was no longer considered transient inflation, but persistent inflation due to global supply chain issues, higher energy costs, commodity, and housing prices. The Federal Reserve projected its intent to reduce their asset purchase program and raise interest rates sooner than later to combat inflationary pressures. The Delta variant was delt with by vaccination mandates and masking protocols. All these factors settled the downward pressures that affected the markets in the 3rd Quarter.

Strong 3rd Quarter earnings led the markets higher through November. The new Omicron variant sidelined markets by Thanksgiving, squashing Black Friday’s sales performance. This led investors to be concerned that the holiday buying season would be a bust. By the second week of December, Omicron concerns had dampened with reports that the variant was less severe than initially thought. Markets bounced to all-time highs, leading us to what looks like the 2021 Santa Claus Rally. What is a Santa Claus Rally you ask?  70 times in the past 92 years stocks have climbed higher in the final five trading sessions of a year, plus the first two trading days of the new year. The year closed out the last trading day with U.S. market slightly down. Overall, the U.S. Markets and economic sectors finished the year up despite the increased levels of volatility caused by multiple COVID-19 variants, surging inflation, and the Fed calling for a tightening of monetary policy (higher interest rates).

International markets showed resiliency against the same head winds that plagued U.S. markets. This quarter the Bank of England was the first in Europe to raise interest rates with other Central Banks possibly following suit. European markets finished 2021 up, versus 2020.  Most of the Asian markets ended the year higher, with South Korea and Hong Kong ending the year lower. 

The pursuit to avoid stock market volatility this year was met with challenges. The traditional haven of the bond market was met with pricing pressure on the back of inflationary concerns. The speculation of higher interest rates forced bond yields higher, and as a consequence of the prospect of higher interest rates, bond prices dropped. This had a negative effect on the performance of any investment strategy that had a moderate to conservative investment allocation. In 2021 the investor got paid to take risk, and growth stocks outperformed value stocks as evidenced in the S&P 500 growth 32% versus value 21% index returns. We do see light at the end of the tunnel in that bond yields may have peaked. As history has shown yields typically spike in the year prior to the Federal Reserve taking action to raise interest rates to combat inflation. The effect of investors speculating where interest rates may go prior to the Federal Reserve acting, results in an overreaction in interest rate movement and bond prices underperforming. Historically a tightening of monetary policy (raising interest rates) has led to a slow down of growth and decrease in inflation. Thus, leading to a rotation into high-quality investments with strong earnings, balance sheets, and cash flows. In other words, “Value” investing, and a normalization of bond price performance. We are positioned to take advantage of this approach which should allow for more stability and less swings of volatility affecting conservative investment portfolios in 2022.

We believe that diversification should be the cornerstone of any investment strategy. We are committed to working with you to ensure the investment strategies we design are in line with an investors risk tolerance. If your circumstances have changed, or you are in need of assessing your risk tolerance to confirm you are invested in a strategy that is appropriate for your risk tolerance, please do not hesitate to contact us. Thank you to everyone who partnered with us in 2021. We are grateful for the opportunity to serve you in 2022. 

Abundance to you,

Scott Miller

Partner