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Zero... Point... Zero

By Morgan Christen


Mr. Blutarsky... zero point zero. After placing them on "double-secret probation," Dean Wormer in Animal House finally put the nail in the coffin for the Delta House at Faber College.

2021 was the year we were "supposed" to have put the nail in Delta, or at least suppressed Covid. But alas, in came the "other" Greek letters.
Market Update
Enter omicron. For anyone in the Greek system in college, you know there are nine more letters after omicron. Don't be surprised to hear about pi, rho, sigma or tau in 2022.

Hopefully we get to omega (the ultimate limit) as soon as possible. We are living in precedented times.

Covid kept us from returning to normal, but the economy did bounce back.
The Biden administration continued to prop up the economy with unemployment benefits, halts on student loan debt and homeowner/tenant evictions, and of course... stimmy (stimulus).

The Fed continued to keep interest rates near zero and resumed bond buying. Supply chains were stressed, we were short chicken wings, diapers, computer chips, cream cheese (ransomware) and cars.
Market Update
Although there were shortages, consumers were out buying, pushing up prices and fueling inflation. In fact, in November the Consumer Price Index rose 6.8% which was the largest print since 1982.

With stimmy, boredom and time, investors pushed up meme stocks, NFTs and crypto currencies. Remember PSINet stadium or CMGI Field? Much like the tech boom back in the 2000's, stadiums are being renamed by companies in the latest craze.
The Staples Center is now Arena. Oh, PSINet Stadium is now M&T Bank Stadium (Baltimore Ravens) and CMGI Field is now Gillette Stadium (New England Patriots). Not predicting the end of Crypto, but there will be consolidation.

Finally, 2021 was the year of letting loose as workers quit (the great resignation), Jack Dorsey (Twitter) stepped down, along with Britney and the Ever Given being freed.
Market Update
Market Update
2021 reversed course for the stay-at-home and work-from-home stocks. Investors bet that Covid was dead and went long the "open-up" trade. Peloton and Zoom were among 2021s worst performers.

Overall, markets delivered a strong year for investors as U.S. corporations pulled in more profits in the three months ending September than ever before (Bloomberg). Markets had challenges on their upward path as inflation spiked, and supply chains disrupted global trade.
Low rates allowed borrowing costs to stay low and stock valuations to stay high. Valuations surged as Apple approached $3 trillion in market cap, while Microsoft was at $2.5 trillion, and Google hit roughly $2 trillion.

Meanwhile, Amazon's revenue ranks them higher in GDP than several countries. U.S. equities bested their foreign counterparts, with small value stocks taking the top spot. Overall, larger companies performed well as the technology stocks in the large growth sector outperformed.
Market Update
Inflation is here, but will it hold? Certainly, wage inflation will be here to stay, which has implications across the economy. Inflation also showed in the value of assets. As an example, the appraiser Miller Samuels reported at least 40 private homes in the U.S. have sold for more than $50 million in 2021. That is a new record.
Market Update
Market Update
The inflationary concerns forced a change in tune at the Fed. No longer do they believe inflation will be transitory and they will likely raise rates two to three times this year. Powell has made it clear that the Fed "won't surprise."

As the Treasury chart shows, there was a subtle shift in rates from the prior quarter, but a more pronounced move from the end of 2020. The anticipation for higher Fed funds rates pushed yields up on the short end of the curve, while flattening out beyond seven years.
Market Update
There are many reasons the market could continue its upward march.

Let's start with what could go wrong.
As we look out at the first few weeks of January, the rise in omicron cases could slow the economy as hospitals could get overwhelmed, new restrictions could be imposed and businesses along with consumers could delay purchases.

We are seeing a rise in inflation along with the worry that central banks will over-react. Finally, will the economy sputter and corporate earnings decline?
Market Update
Covid will be around for a while and we will learn to live with it. The rapid spread of omicron could work in our favor as it should peak rather early and could help herd immunity.

2021 saw the ending of lockdowns and a robust economic recovery that lead to increased demand for consumer goods while supply chains were slow to re-start.

Add in all the cash infusions from the Fed and it is no surprise we have inflation.
As the chart above shows, the main jump in inflation has been from oil. As the Fed looks to taper bond buying, we are reminded of the 2013 taper tantrum. After comments from then-Fed Chief Bernanke in May, stocks initially fell, but the market was up 17.5% for the year. Most see the increase in rates as a "net positive" as it is a sign the central bank is comfortable with the US economy. The future does not look that inflationary as the Census Bureau released estimates that show the U.S. population only growing by 0.1% (only 392,665 people) between July 1, 2020 and July 1, 2021.

That is the lowest rate since our nations founding.
Market Update
Market Update
Real GDP surpassed the pre-pandemic level in 2021 and should build on that. Earnings growth should slow into 2022 but should be generally positive. Corporations appear to have strong balance sheets, strong earnings, and cash.

Wall Street consensus is for real GDP to grow at +3.9% in 2022, with the number being front-loaded. Estimates are of +4.2% in the first half, followed by +2.9% in the second.

Assuming the Fed does not deviate from their plan or a more deadly form of Covid does not emerge, we believe the market should keep its toga on and party into 2022. We do not anticipate the returns of the prior year and we are adjusting your portfolios to accommodate higher inflation, interest rates and a move away from growth.
With the potential for higher interest rates, we are continuing to reduce our bond maturities, and adding inflation-adjusted bonds. You will also see some alternative and arbitrage funds that will further diversify your portfolio.

As the chart below shows, there are always reasons to sell. As Carlos Slim once said, "anyone who is not investing now is missing a tremendous opportunity."

We look forward to speaking with and/or seeing you in 2022. We hope this will be a great year for you and your family. Please let us know if you have any questions as we move into 2022.

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DISCLOSURES: Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. Bloomberg Barclays data provided by Bloomberg. FTSE fixed income © 2018 FTSE Fixed Income LLC, all rights reserved. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2018, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014. Charts from Dimensional Fund Advisors. Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government's full faith and credit and are exempt from state and local taxes. The indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.