HAPPY NEW YEAR!
In this year-end report, we will review the following topics:
- Behavioral Finance
- Notable Headlines
- Economic News
- Market News
What’s on your mind? As market volatility increases, what is the outlook for 2022 and how will it affect my portfolio and goals? How high will the markets, interest rates, and inflation continue to grow?
Our Views- The stock and bond markets ended the year with increased volatility due to inflation, higher anticipated interest rates in 2022, and growing concerns over the impact of the Covid–19 Omicron variant.
- The markets are showing mixed signals. For now, Fed policy remains expansive which is bullish for stocks. More on this later.
- Price inflation is continuing at an increased pace. We are hopeful inflation will start to normalize within the first six months of 2022 but would not be surprised if inflation were to remain higher over the next few years. We believe it is best to plan for inflation rather than to ignore it or to hope that its impact is unfelt.
- The economy is performing reasonably well. Frankly, all the fundamentals look strong except labor related issues associated with supplying goods and services. Demand remains high and continues to stoke the economy. The trend should continue into 2022, albeit slower.
- While the last three years have experienced double-digit market performance, remember that markets do not always move in a linear fashion. Market corrections should be expected and are a normal part of the investment experience.
- Interest rates remain very low while inflation is significantly higher. This means that your purchasing power with every dollar is becoming worth less. Example – Let’s say you make .25% on $10,000 in your savings account and inflation is 3% (in reality 6.8% today). Your $10,025 would buy approximately $9,725 in goods and services. Over time inflation can have a dramatic impact.
So, regarding your cash reserves, you will want to maintain enough for emergencies and incidentals but not too much, with concern over losing purchasing power related to your future needs and goals.
- Stay engaged in the planning process with us and stay focused on your goals. Greater financial awareness will lead to more confidence in your plan and less concern over market corrections.
- The investment allocations that you have with us are designed for risk-adjusted rates of returns that are compatible with your time horizon, risk tolerance, and risk capacity. Your allocations and needs are dynamic. Approaching new milestones such as changes in your family, starting a new business, and retiring, present great opportunities to review your current portfolio strategy and consider your options.
- Given significant market appreciation since 2009 and increasing inflation, we encourage you to re-examine your household budgets and goals and meet with your MGFS adviser.
- Our inspirational quote this quarter comes from author Roy T. Bennett. “Start each day with a positive thought and a grateful heart.” What a wonderful way to start the day, wouldn’t you agree?
- The debt ceiling was raised in December, which enables the government’s borrowing to increase, by $2.5 trillion in 2022.
- The Biden administration’s $3.5 trillion ‘Build Back Better’ legislation did not pass in December because it lacked Republican support in its entirety and did not have the needed support of West Virginia Democratic Senator Joe Manchin.
- Covid-19 cases increased substantially in December, primarily due to the Omicron variant.
- The Biden administration will extend the pause on federal student loan repayments through May 2022, as the moratorium was about to expire.
- The spread of the Omicron variant has forced some restaurants, stores, sporting events and entertainment venues to shut down, bringing back memories of March 2020. For now, these closures are short-term in nature and on a smaller scale. CDC mandated quarantines have been revised down from 10 to 5 days with an additional 5 days of wearing a mask. Details can be found on the CDC website.
- The Federal Reserve intends to end purchasing securities (also known as tapering) in March of 2022, several months earlier than previously announced. They also anticipate raising interest rates three times in 2022 to combat inflation. Bond prices will certainly be affected. The impact level will be determined by the degree the market accepts this before it happens. With time, bondholders could be rewarded with more income from higher yields that can both offset bond price declines and provide for those who’ve long awaited higher income. With optimism, we may see greater foreign investment in higher yielding US government bonds, as we have experienced the last few times the Fed tapered and rates increased in the US.
Equity markets will be dependent upon the steepness of the rate increases. If small and measured, the market historically has performed with confidence and recovered with resilience from intermediate volatility. If necessarily large to counter the impact of a long-term inflationary environment, the market will experience greater volatility and has historically recovered, on average, over the next 1.5 years.
- New housing activity remains strong despite ongoing supply problems.
- The number of jobs increased by 235,000 in November, bringing inflation to 4.2%. Although this is historically low, total jobs are 2% below the pre-Covid peak. By around September, a staggering 4.3 million Americans had quit their jobs for a variety of reasons, including retirement, making it challenging for companies to fill vacancies. This was dubbed “The Great Resignation.”
Let’s remember, while history does not repeat itself, we identify patterns with labor, interest rates, inflation, consumer and government spending, wages, debt, and more, which help us form reasonable expectations. Even during current uncertainty and “The Great Resignation”, understanding this data shows total jobs improved by yet another 1% through the summer. At this rate, we could be back to pre-Covid levels, a year sooner than many expected.
Inflation – VERY IMPORTANT
- As a quick refresher, we want to remind you that inflation is primarily a function of monetary policy, although it can be indirectly affected by fiscal policy. It occurs when the Fed creates (prints) an excessive amount of money over an extended period and that excess money supply creeps into the economy. The result of excessive money printing is that it creates an economic environment where there is too much money chasing too few goods and, therefore, price inflation. Add in a worldwide supply shortage from the 2020 global lockdowns and price inflation (costs) go up even more.
- The U.S annual unemployment rate went up 6.8% in November, the highest level since 1982. The food index climbed 6.1% and energy rose 33%. In general, you can see that the prices of products and services climbed dramatically in 2021.
- Fed Chairman Jay Powell recently stated that he was ‘retiring’ the idea that ‘inflation is transitory’. In other words, the underlying message was that inflation is real and must be addressed.
- As the Fed stops printing money, banks will want to loan money (and at higher rates); they will do this with excess cash reserves already fueled by the Fed. Ironically, these loans may offer assistance to businesses and consumers as needs emerge but may also generate more price inflation.
We will be watching inflation closely in 2022.
- 2021 started strong with an expected outperformance from non-US companies. They ultimately lagged the US. Energy was up 54% with the high performing Information Technology and Health Care sectors in the middle of the pack performing 34% and 26% respectively. Utilities performed the least with a strong 17.67%. Large growth companies outperformed large value companies for yet another year while Mid and Small value companies outperformed their growth counterparts. While we don’t make market calls we do believe in diversification and our portfolios continue to outperform with a strong overweight to US over International stocks. Fixed income detracted from overall performance. Diversifying with different types of fixed income has helped modestly. Should there be a larger decline or correction, holding bonds should dilute the magnitude of this potential impact on your portfolio. Markets saw terrific performance again in 2021*, despite higher-than-average market valuations and recent volatility:
- S&P 500 68%
- All Country World Index excluding U.S. 82%
- ICE BofA High Yield Bond 35%
- 2 yr Treasury -0.53%
- 5 yr Treasury -2.82%
- ICE BofA Global Corporate -2.95%
- ICE BofA 7-12 yr Municipal 05%
- Facebook, Amazon, Apple, Microsoft, and Google were collectively up 37% and makeup 23% of the S&P 500.
- We like to watch and quote economist Brian Wesbury in our writings. He remains bullish in the markets for now and believes they have more room to grow. However, he sees potential clouds on the horizon starting with potential rising taxes, greater business shutdowns, and higher interest rates due to rising inflation.
* Performance summary provided by First Trust
Stay tuned; as 2022 should be an interesting year, including the mid-term elections next fall (is it that time already?).
MGFS side note– Please check out our new revised modern looking website at MGFS.net. We worked very hard in 2021 to understand who we are as advisors and with whom we do our best work – busy professionals, business owners, pre-retirees and retirees. Let us know what you think!
Thank you for your trust and the privilege to serve your financial needs.
Happy New Year to you and your loved ones!
Wealth brings complexity, we bring clarity.
Adam L Schwartz, Partner, CFP®, NSSA®
Barry E Moschel, Partner, RICP®, CLU®, ChFC®, CPA
Tom A Manno Jr., Partner, CFP®, CPFATM