Q4 Year End Market
Update & 2022 Preview

It’s been a truly remarkable few years for investors and 2021 exemplified this with stellar market returns despite seemingly perpetual adversity. On the heels of another index-shattering year, the S&P500 never slowed down, rising 26.9% for 2021, the third-largest single-year return since the 2008 financial crisis. With 2020 in the rear-view and vaccine breakthroughs promising an economy to reopen for business as usual, 2021 kicked off with high optimism. Market participation reached new peaks as meme stocks and Robinhood trading garnered interest from a younger tech-heavy generation. Even with rising inflation and supply chain issues causing headaches, the rally ran mostly uninterrupted until mid Q3. Q3 was when new Covid variants Delta, and Omicron broke through, reminding all that in some capacity, this virus is here to stay. Despite resulting periods of mild volatility in markets, the U.S. avoided any massive shutdowns as the new strains proved to be less severe than their predecessors. The year capped off with a strong “Santa Claus” rally sending both the S&P and Dow to new all-time highs. U.S. corporate earnings surged through the year with Q3 profits amounting to 11% of GDP, a new record. While we do not have Q4 holiday data yet, consumer spending remained elevated throughout the year even as sentiment retreated amid the new variants. Additional rally support came in the lack of change by the government, namely no major tax reform and the failed “Build Back Better” bill were net positives to investors. Ultimately, heightened inflation (6.8% surge in November) and expedited tapering timelines from the Federal Reserve (doubling monthly asset purchases) did little to slow momentum. Markets in 2021 were incredibly resilient.

• The S&P500 returned 26.9%, Top sectors were Energy (48%), Real Estate (43%), Technology (34%), and Financials (33%).
• All 11 sectors were positive for the year, and for the first time, all 11 returned double digits, with Utilities (14%) being the lowest.
• The Bloomberg US Corporate bond index fell -1% in the face of rising interest rates.
• Less rate-sensitive high yield bonds rose.
• The Bloomberg US High Yield Corporate index returned over 5%.
• Gold fell -4%, Silver fell -12%.
• Cryptocurrency expanded rapidly, bitcoin surged- spending parts of the year above $60k. Ethereum returned over 400%, and the NFT market surpassed $13 billion in trading volume.
• Gasoline prices rose 58% on average.
• Over 6 million homes were sold, and the average home price rose approx. 20%.
• Covid vaccinations (at least two shots) were administered to more than 61.5% of the population, over 204 million people.

Coming off a stellar year of record-breaking returns, we now face inflation and rising interest rates. Most forward guidance from economists and market analysts alike has been cautious. We echo that sentiment Q1 2021 Market Commentary but believe ultimately, we are in store for another year of growth driven by corporate earnings and increasing margins. Much like the changes in return attribution from 2020 to 2021, more sector rotation is in store ahead. Starting with our equity ETF portfolios, we are recommending increased exposure to broad commodity baskets, real estate, and utilities. To make these adjustments and additions, we are not looking to make drastic changes, but rather multiple small ones across sectors to complement the positions we have already owned in 2H 2021. We prefer a tactical approach to passive investing when adding these types of positions by utilizing the various management strategies available in the exchange-traded fund space. For example, in adding broad commodities exposure, after performing due diligence across the entire commodities fund universe, the fund we decided to add holds not only the traditional commodities (metals, energy, crops) but also a small allocation (3%-5%) to bitcoin futures. While that is just one example, our investment committee is applying that type of due diligence and decision-making to every fund that goes into our strategies.

In fixed income, we face a challenging environment ahead- one where we ultimately know that interest rates will rise. The fed is eyeing three interest rate hikes in 2022 to address high inflation, we believe the likely outcome is a general flattening of the yield curve as short rates rise more than long. We have long been advocates for owning individual bonds, and the various benefits. Along with our consistent performance in the space, the period ahead of rising rates will help support our thesis. Credit research and due diligence will continue to lead our process as we buy bonds for permanence and predictable income streams ahead in 2022. In an ever-expanding search for yield, we continue to complement our bond portfolios by investing in the private markets. With an already diverse set of private real estate and private debt investments available, we anticipate additional opportunities to emerge this year.

As mentioned earlier, a significant catalyst for the market to move higher in 2022 is corporate earnings, and specifically profit margins growth. Consensus estimates show that earnings and profits will break more records in 2022, something that despite inflation, could help push equity markets higher. Below is a chart from FactSet that shows the 2022 projected Net Profit Margin of the S&P500 companies.