Dear Clients, Families and Friends:
My, how our world has changed. The last couple of years have been surreal to say the least. We’ve witnessed incredible market volatility, record low interest rates, negative crude oil futures prices, a self-inflicted recession due to the COVID-19 pandemic and lockdowns, a controversial presidential election and we’re now on our second variation of the Coronavirus – Omicron.
As a Certified Portfolio Manager, it is important to become divorced from day-to-day headlines, and focus on the investment process and risk management of portfolios. A good place to start is by looking at the wisdom of other successful investors and learning from their experience.
These wisdoms were born out of years of mistakes, miscalculations and trial-and-error. Of course, what made them all successful was the ability to learn from their mistakes and capitalize on that knowledge in the future. Experience is an expensive commodity to acquire which is why it is always cheaper to learn from the mistakes of others. As a result, I wanted to do something completely different this month by quoting a couple of high-profile investors’ thoughts on investing in the markets over the years. I hope you find this interesting.
James P. Arthur Huprich’s Market Truisms and Axioms
James Montier’s 7 Immutable Laws of Investing
And now, let’s review 2021 and talk about what might be ahead in 2022.
A banner year and a new year
The year 2021 was a banner year for investors. The broad-based S&P 500 Index, which is made up of 500 larger U.S. companies, finished the year up 26.9%. If we included reinvested dividends, the index advanced 28.7%, according to S&P Dow Jones Indices.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA*
MSCI Emerging Markets*
Bloomberg US Agg Total Return
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: Nov 30, 2021-Dec 31, 2021
YTD returns: Dec 31, 2020-Dec 31, 2021
*In US dollars
Much better-than-expected corporate profits (Refinitiv), which were powered by an expanding economy, plus a super easy monetary policy compliments of the Federal Reserve, deserve much of the credit.
Low interest rates, low bond yields, and rising profits easily offset worries about the lingering pandemic and much higher-than-expected inflation.
But we are now looking ahead into 2022. What might the new year bring? After last year’s strong advance, what might be in store for this year?
Since 1950, there have been 26 years in which the total annual return of the S&P 500 Index exceeded 20%, according to data provided by the NYU Stern School of Business. In the following year, the S&P 500 Index advanced 20 times, or 77% of the time, in line with the long-term average.
The average up year was 18.1%, while the average down year was 6.4%.
It’s an interesting exercise, but let’s always remember that past performance is no guarantee of future performance. Each year will have its own distinctions.
We could add one more wrinkle. The total return of the index has doubled over the last three years, according to Dow Jones Indices.
What dictates the market’s direction will likely be the economic fundamentals and whatever impacts those fundamentals.
For example, what might the Federal Reserve do with interest rates? At the beginning of 2021, the Fed expected no rate hikes in 2022. However, it failed to anticipate last year’s surge in inflation.
As the year ended, the Fed’s new projections, which it released after its December meeting, reflected a forecast of three quarter-percentage-point rate hikes this year.
Are those potential rate hikes already being discounted by investors? If inflation fails to ease–or worse, accelerates–could the Fed take a more aggressive posture?
Let’s take this point one step further. Longer-term bond yields have remained very low in the face of a less dovish Fed, high inflation, and robust economic growth.
Will we get a reset in 2022? Or have there been fundamental changes in the bond market that are holding yields low? Or do bond investors simply believe inflation and economic growth will slow?
Corporate profits are also a key driver of stock prices. Consider this: If you were to purchase or sell a small business, wouldn’t recent and projected profitability play a big role in the sales price? It absolutely would. The same principle holds for publicly traded companies.
How will the pandemic play out? We’ve seen Delta and we’re now seeing a surge in cases tied to Omicron. The economic impact of Delta was limited, and thus far, investors have side-stepped economic worries about Omicron. But what does 2022 hold?
We’ve posed several important questions that don’t offer easy answers. We may see a pullback in 2022, and we recognize that downturns are a part of investing.
Based on your goals, circumstances, and risk tolerance, we craft portfolios that help manage risk, but we can’t eliminate risk.
If one trades the fear of a sell-off for a savings account, one won’t participate in the long-term upside that stocks have historically offered. Conversely, take on too much risk when the market has been strong, and you may experience sleepless nights in a swift downturn.
If life events have forced you to rethink your goals, let’s talk. Financial plans are not set in stone.
Yet, adherence to one’s financial plan and a long-term focus have historically been the straightest path to reaching one’s financial goals. We may see volatility next year. But predictions are simply educated guesses. As we’ve seen in the past, sell-offs, when they occur, are followed by rebounds. Keep this in mind as we navigate the New Year together.
As always, I’m honored and humbled that you have given us the opportunity to serve as your financial advisors. Never forget that we are here for you, your family and your friends.
Wishing you a Happy and Prosperous 2022,
The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries*. With 6,211 constituents, the index covers approximately 99% of the global equity opportunity set outside the US. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index’s three largest industries are materials, energy, and banks. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of William Y. Rice III and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee
that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does
not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information.
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