The Financial Quarterly, 4th Quarter 2021
Markets delivered exceptional performance in a year that had a little bit of everything: politics, bubbles, meme stocks, inflation, runaway rallies, and sudden drops. Let's take a look at how markets performed last year and what we expect will happen in 2022.
By Jon Castle
How did markets perform last year?
What Can We Expect 3-9 Months Ahead
"While pandemic disruptions remain, 2022 offers hopes of greater normalcy."
What we expect from 2022
While we generally try to avoid making too many predictions – it is necessary to clarify one’s “situational awareness” to crystalize an investment policy at any given time. Effectively, discussing what we think is happening and what we think will happen in the future because of a study of past events tends to sound very much like making predictions. So… at the risk of being cliché, here is our understanding of current events and how we think things are most likely to play out throughout 2022.
We feel that inflation will continue through mid-2022, as consumer demand remains strong, but supply continues to be a challenge.
We believe interest rates will rise, which will create headwinds for growth stocks and make dividend-paying, value-oriented stocks more attractive than they have been previously.
There will be more market unrest and uncertainty in 2022 than in 2021. We can expect “doldrums,” – periods of choppy, sideways market behavior at times.
We do not believe we will see a recession in 2022 or even in 2023 unless an unpredictable and highly improbable event (such as another pandemic?) appears. This is meaningful in that recessions cause deep market crashes, while occasional minor corrections can occur at any time. Market crashes are best avoided if possible, while market corrections are generally best endured or even used as buying opportunities.
Given the fact that bond prices drop as interest rates rise, we feel that returns from fully diversified bond portfolio component will be generally mediocre but not necessarily negative, as higher interest payments from some types of bonds may offset price drops in others.
Given the adaptability and innovation inherent in the US economy – more so than any other economy in the world - specifically identifying sectors or companies that are going to outperform the market in the future – and incorporating them in portfolios in a timely manner without tax consequences – is difficult. Accordingly, we are gradually returning PARAGON portfolios to be low-cost, tax-efficient, generally balanced between growth and value and more reflective of the overall market indices versus trying to outguess the markets themselves.
As a whole, we are optimistic and believe that it is still a very positive time to be an investor – especially a patient investor. We currently are fully invested, but, given that nearly all market crashes accompany recessions, also remain on the lookout for any quantitative data suggesting a recession looms. Currently, despite the challenges that are apparent everywhere one looks - no quantitative recession prediction models are in 'alert' territory.
If history is a guide, it should be several years after the Fed’s first interest rate hike before we have to worry about a recession caused by a too-tight monetary policy. We are tailoring our investment policy to reflect an expectation of continuing, but muted growth as it typical of a slowly tightening Fed – but we will also remain vigilant for any signs of an early economic cycle breakdown should that come to fruition.
We at PARAGON wish you a Happy New Year and a prosperous 2022!
Sources:
1 https://www.cnbc.com/2021/12/30/stock-market-futures-open-to-close-news.html
2 https://www.cnn.com/2021/12/31/economy/economy-covid-inflation-2022/index.html
4 https://www.marketplace.org/2021/12/31/what-might-consumer-spending-look-like-in-2022/
5 https://www.cnn.com/2021/12/03/perspectives/jobs-labor-market-trends-2022/index.html
6 https://www.cnbc.com/2021/12/16/why-former-us-treasurer-is-optimistic-about-economy-in-2022.html
U.S. Economic Outlook, Equity Outlook, Consumer Spending, Labor Market, Business Outlook, and Fiscal Policy gauges: https://www.cnr.com/insights/speedometers.html (December 2021)
The S&P 500 is a stock index considered to be representative of the U.S. stock market in general. The NASDAQ Composite Index is an unmanaged composite index of over 2,500 common equities listed on the NASDAQ stock exchange. The Dow Jones Industrial Average is a price-weighted index that tracks 30 large, publicly traded American companies.
All index returns exclude reinvested dividends and interest. Indices are unmanaged and cannot be invested into directly.
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