Jan 27, 2022
It may be hard to believe, but 2021 was generally a good year for the capital markets.
Especially for large-cap U.S. companies, as the S&P 500 rounded off its strongest three-year rally since 1999 (+72%). Small, mid, and international companies performed reasonably well but lagged the stellar performance of the S&P 500. Emerging Markets continued to struggle, especially China as it faces issues with its debt-burdened property market.
All the while, long-term interest rates continued to surprise even the most astute economists. Inflation rose to the highest level we’ve seen since 1982 (+7.0%), while the Fed responded by beginning to taper its massive amount of monthly bond purchases and beginning to discuss the eventual increase in short-term rates in 2022. Despite all that, the US 10-year treasury yield ended at a measly 1.44%.
The point is: markets will always surprise us. That’s because markets don’t move based on what happens – they move based on how actual events compare to expected events.
And the truth is, 2021 wasn’t really the year we all expected it to be. We probably didn’t expect the pandemic to continue as long as it has. We probably didn’t anticipate supply-chain constraints to cause prices to escalate as much as they did. And we probably didn’t believe that the stock market could continue marching upwards, mostly unabated, to the tune of +28.7% during the year (for the S&P 500).
Even for those that made the “correct” calls for economic conditions in 2021, their investment picks were still likely wrong as assets behaved differently than the textbooks would lead you to believe – like those that would have expected the headline inflation numbers to drive interest rates higher or a stock market selloff and a gold price rally. Or those that claimed the market was too “expensive” and subsequently sold all their stocks (or went short!).
The better strategy, in our opinion, is to look at long-term trends and pick quality investments that will perform better than average over time. This means investments that will likely survive through good and bad cycles – with an appropriate mix of growth and safety that matches the needs of your specific financial plan.
Looking forward to 2022, we want to remind clients that short-term predictions are a futile activity. The better option is to manage your portfolio appropriately to match your plan to the current state of the economy with an eye on the long-term trend. Remember, we’re playing the long game and the key is to stick to the plan while mitigating unnecessary risk. If there are assets that don’t make sense for your plan anymore or if you are lacking important exposures, it’s time to make a move.
We could tell you our internal forecasts and expectations for 2022 – trust us, we do have these. But even as we think through these shorter-term indicators and put some thoughts down on paper, we know that at the end of the day, we’re going to be wrong about much of it (possibly most of it). In fact, our Chief Investment Officer has often stated: “Our range is so wide, you could drive a truck through it.” But what matters is that we are analyzing our investment strategy through the prism of not just what we think will likely happen, but what other alternative scenarios could play out. We care most about our outlooks for our businesses over the next three to five years, at a minimum (if not 10+ years). That’s how we can be confident we’ve built a portfolio that will keep our clients on the right path to meet their goals.
Now, more than ever, we believe active investing is critical. The days are limited where a truly “passive” portfolio can deliver what you need for an integrated and customized investment strategy. To do better, you need to think differently. Don’t settle for average. That is what we are here to do for our clients, and we are grateful for the opportunity to serve all of you.
Download a full version of our Year in Review using the download link above.