The Year Ahead in 2022

As we begin 2022 I’m struck with how extreme everything feels right now.  There’s a palpable sense of optimism and fear, confidence and doubt.  Last week the S&P 500 reached new highs after spending much of last year doing the same.  Last year the US stock market was up over 25%, international developed stocks were up over 12% and global real estate was up an astounding 31%.  Emerging market stocks were down 2.5% and the US bond market was down 1.5%.  These strong market returns, however, came amid the backdrop of some of the highest monthly inflation numbers in 40 years, soaring COVID-19 case rates, labor shortages and supply chain issues.  Moreover, when the US stock market hits new highs it makes us investors feel good, but it leaves us with that all too common feeling of ‘so is it all downhill from here?’ 

I’ve summarized below three themes that seem to be causing heartburn for investors.  For a more detailed analysis of these items, refer to ‘Market Review 2021:  A Recovery Amid Challenges’ written by the folks at Dimensional Fund Advisors who, in my opinion, remain one of the most knowledgeable and trustworthy sources for financial information.

Inflation

November’s monthly inflation was up 6.81% over last year, the highest in nearly 40 years.  There’s much debate whether this level of inflation is here to stay or just ‘transitory.’  Unexpected inflation, no doubt, can cause volatility in the stock market but keep in mind that over the past 30 years the US stock market has provided long-term returns in excess of inflation.  Further, there is no connection between periods of high or low inflation and US large cap returns.  Bad returns can happen when inflation is low and good returns can happen when inflation is high.  

Government Debt

US government debt held by the public is now over $22 Trillion, or about 123% of GDP (China is at 263% of its GDP!).  Many investors are understandably nervous that these high government debt levels are unsustainable and could cause an economic crisis.  But again, there is little historical evidence of a strong relationship between a country’s debt levels and equity market returns.  A country’s solvency is dependent on a number of variables, most of which are ‘slow-moving,’ meaning they are priced into the market quickly and don’t come as a particular surprise to investors. 

Record-High Prices

We investors tend to think that markets follow the laws of physics (’what goes up must come down’) and view ever increasing prices with skepticism.  However, between 1926 and 2021, average returns one, three and five years after a new market high are similar to those of any one, three and five year period.  A certain market or company reaching new highs doesn’t necessarily mean a correction is due.  I’ve attached a great piece titled ‘All-Time-High Anxiety’ for those interested in digging a little deeper.

In summary, the year ahead has reason for both optimism and doubt and it’s tempting to alter our financial strategy based on these feelings.  But as we know, it’s unbelievably hard to consistently time the market and the vast majority of those who try end up worse off.  Over a long-term investment horizon the global economy and market is just too complex to anticipate and is largely out of our control.  Instead, we must remain committed to focusing on what we can control…intentional long-term planning, taxes, diversification, and most importantly, our behavior.  Thank you for the opportunity to continue to earn your trust as we navigate the new year together.

May the start of this new year bring you and your family health and peace,

-Andy