Portfolio Strategy Review 2021

by | Jan 16, 2022 | Portfolio Strategy


Between the pandemic that won’t go away and the politics of the day, US stock markets shrugged it off and delivered extraordinary returns in 2021. At least we are closer to the end of the pandemic. The politics I’m not so sure about.

Economic growth forecasts for 2022 are coming down on Omicron concerns. We aren’t experiencing lockdowns, but many businesses are finding it hard to hire employees. Supply-chain issues are improved but still not operating at pre-COVID efficiency.

The hottest sectors from 2020, weren’t so hot in 2021. Still, the S&P 500 is up 115% from the COVID lows of March 2020. What way will markets go this year? By how much? Wall Street consensus forecasts are almost always up. Analysts publish a slew of well-reasoned short-term predictions that usually aren’t accurate – a coin flip at best. History tells us that markets have trended up 70% of the time on average. Below are various 10-year forecasts. All less than the long-term average. Much less in some cases.

Keep in mind these forecasts are for the S&P 500 only. We invest in multiple asset classes, so all the eggs are not in the same basket. Diversifying assets in this way helps lessen shorter-term fluctuations in your portfolio. It is reasonable to expect moderate returns over the next few years given high valuations and it does appear we have further headwinds going into 2022: government stimulus is set to scale back from the past two years; inflation is higher than we have seen in a long time; and interest rates may be moving higher.

Inflation – Will Prices Stabilize?

Rents and home prices are rising faster than wages. Some analysts believe the housing shortage will keep prices moving higher because millennials are discovering home ownership, boomers are buying up property with all cash offers, and private equity led investors are also buying up single family housing and playing landlord. Basic commodities like oil and food items have also moved higher.

The Federal Reserve changed its tune about inflation being “transitory.” They will begin to raise short-term interest rates this year to try and stabilize prices. Rising rates could make housing more expensive and curb demand; higher cost of credit could also slow overall economic and investment activity. Mortgage rates have jumped significantly over the past 5 months.

Can the Fed’s efforts influence long-term bond rates? The US still has higher rates than every developed economy on planet earth. Global buyers looking for safe yields in US Treasury bonds could keep long-term rates low. The cheap money might be good for speculative assets, but its less than ideal for retirement living. Low rates and inflation make it especially difficult for retirees who are living on fixed incomes.

Other analysts believe that technology will continue to exert a deflationary effect that will moderate rising prices. The Economist, believes that the aging Japanese population and its debt-driven, deflationary experience is not an outlier, but a harbinger for the developed world. Rising debt levels and demographic trends in the US, Europe, and China show aging populations with declining growth. Larry Summers has referred to this phenomenon as secular stagnation. Economies can’t sustain growth if the population is declining.

Bitcoin to the Rescue?

Or will innovation, Web 3.0, and cryptocurrencies lead us into libertarian utopia? The true believers think that Bitcoin and other digital currencies will save us from government corruption, regulation, and the unproductive printing of money which causes inflation. I have continued to study these assets, and still believe at this point they fall into the speculative realm. Assets that fluctuate 30%-40% in a month are neither a reliable store of value nor a safe currency to buy things as some of the crypto crowd contend.

More on cryptos in another note.

Asset Class Review

United States: stock markets were stellar, with large stocks outpacing small cap, mid cap and international markets. COVID concerns lead to some weakness but overall, the economy is expected to have its best performance since 1984. Inflation spiked to 7.0%, while unemployment fell to 4.2%. Energy, Technology, and Financials outpaced the broader market.

The Eurozone: strong corporate profits and economic resilience offset Omicron fears, though several countries introduced restrictions to reduce its spread. Volatile gas prices contributed to 4.9% inflation, compared to -0.3% in 2021. The European Central Bank said it would scale back bond purchases but ruled out interest rate rises in 2022. In Germany, Olaf Scholz of the Social Democrats succeeded Angela Merkel as chancellor.

Asia-Pacific: China was the worst-performing market in the index owing to lockdown fears. Taiwan and India were strong with over 20% gains, while most of the other countries in the region performed under the benchmark.

Emerging Markets: the benchmark was down for the year. Oil producing countries Russia and Mexico both posted gains over 20%. Russia stirred geopolitical concerns with its continued troop build-up on Ukraine’s border. Turkey was the weakest index market, amid extreme currency volatility. The central bank lowered its policy rate by a total of 400bps to 14%, despite above-target inflation of 21.3% year-on-year in November. Chile also lagged the index as leftist Gabriel Boric was elected president. Brazil underperformed as the central bank continued to hike rates in response to rising inflation; the policy rate was increased by a total of 300bps during the fourth quarter. Meanwhile, concerns over the fiscal outlook, and political uncertainty ahead of October 2022’s presidential election, also weighed on sentiment.

US REITs: were strong for the year. E-commerce continues to grow and drive further demand for industrial warehousing.

Commodities: were led higher by oil prices due to increased demand in the wholesale gas market; all its components were also positive. The price of natural gas was significantly higher in the quarter, closely followed by gains in the prices of gas oil and heating oil.

Bonds: yields across the developed economies suffered price declines with rates rising and the threat of tighter policies heading into 2022 to ward off inflationary pressures.

Jerry Matecun – Founder, President
Expert guidance to plan your future, preserve your lifestyle, and retire with confidence. For a confidential consult, contact me at jerry@compoundvalue.com.

PLEASE NOTE: You can’t invest directly in an index. Past performance does not guarantee future performance. All investments are subject to risk, including possible loss of the money you invest. Diversification does not guarantee profit or protect against a loss. Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. For details please see Disclosure.

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