As the New Year is upon us, on behalf of everyone at Roehl & Yi, we would like to express our sincerest gratitude to both our employees and our clients. The current times in which we find ourselves take great resolve, patience, and a willingness to be nimble as we move through an evolving societal and financial environment. Know that we truly appreciate you.
Despite vast market swings, deep supply-chain lags, evolving tax and legislative agendas, and continued COVID-19 concerns, Roehl & Yi is hopeful and believes the financial horizons will steady and remain bright.
2021 – Perspective & Reflection
2021 was a year of rebound and recovery, and for many, a year unlike any other. It was full of surprises that kept businesses, employees, investors, and families on their toes—not the least of which was the emergence of the latest COVID variant, Omicron. Given the trillions of dollars in central bank stimulus and with the highest levels of inflation since 1982—stocks soared, bonds slumped, and cryptocurrencies saw a dizzying amount of volatility.
From an investment standpoint, value stocks rivaled growth stocks for the first time in years and corporate earnings continued to break records despite supply-chain issues and swelling inflation.
The S&P 500 Index ended 2021 with an annual gain of 28.7%, far exceeding most strategists’ expectations, and the Russell 2000 small-cap value index increased by 14.8%. (Source: Morningstar Direct)
The US bond market shed 1.5% for the year and the yield on 10-year US Treasury notes rose 1.496% for 2021 in contrast to a yield of just 0.501% on March 9, 2020, the lowest closing yield ever on record in 231 years of trading. (Source: Treasury Department)
Here is a snapshot of market activity for 2020 and 2021.
(Source: Blue River)
US stocks continued to outperform foreign equity markets, extending their current streak to four consecutive calendar years.
During the last 14.1-year period, the S&P 500 Index outperformed international stocks (MSCI EAFE) by a cumulative 275%. This is by far the longest period and highest magnitude of outperformance by US equities going back to 1970. (Source: JPMorgan)
The Chinese Market
The 2021 default of Chinese property developer Evergrande demonstrates that China’s market is not without its weaknesses, slowing the nation’s annual growth rate to 4%-5% (more in line with that of the US). In addition, those in support of freedom, capitalism, and the free flow of ideas may find it increasingly difficult to invest in China, especially as its stock market lost 22% in 2021. (Source: Blue River) We will continue to watch for significant investing implications in the broader Asian market.
The Speculative Aspect of Investing Remains
One recurring theme Roehl & Yi monitors is the “speculative” aspect of investing. This phenomenon shows that investor appetite for certain stocks shifts greatly over time. We believe that speculative investing and a lack of a focused strategy can significantly contribute to market volatility.
We also believe that speculative investment is clearly exemplified in the performance of several companies classified as “stay-at-home” stocks that attracted huge investments. The following stocks experienced massive gains in 2020, but subsequently retreated to become some of the weakest-performing names in 2021.
“Stay-at-Home” Stocks That Plummeted (2021 Annual Returns)
- Peloton: -76.92%
- Teladoc: -54.9%
- Zillow: -51.05%
- Zoom: -47.96%
- DocuSign: -32.58%
From the beginning of 2020 through October 19, 2020, Zoom, a video-conferencing service now familiar to millions of Americans, was up an astounding 727.04%. Since peaking on that date, however, the stock lost over two-thirds of its value in just one year. (Source: Morningstar Direct)
In addition, Bitcoin, the world’s top cryptocurrency, ended 2021 with its value dropping nearly 50% from its record high in mid-April. (Source: Blue River)
These tremendous price swings may have been the result of government stimulus (and its subsequent removal), stock market inflows, and a lack of a long-term investing mindset. Warren Buffett describes this type of investing as casino-like behavior.
2022 – A Look Ahead
2022 is likely to offer more moderate investment returns, inflation levels, and economic growth. Roehl & Yi believes global growth will slow in 2022 but remain positive for the year.
US GDP is expected to grow 3.9% in 2022, with the first half of the year reaching 4.2% and the second half nearing 2.9% growth. (Source: Bloomberg)
Annual inflation is expected to fall back to 2.7% in 2022 and reach 2.2% in 2023 through 2025. (Source: Goldman Sachs) US equities have projected returns of between 2.3% and 4.3%, with global equity return (unhedged) ranges between 5.2% and 7.2%. (Source: Vanguard Investment Strategy Group)
Global economies remain poised for a second year of growth as developed countries have spare capacity, though they also have higher COVID case trends in some regions with a renewed threat of lockdowns.
The effects of the Omicron variant will remain important to watch into early 2022, but of greater significance will be any macro-economic policies and the likely reduction of stimulus from central banks around the world.
Quantitative Easing and Interest Rates
In its initial response to the pandemic, the Federal Reserve (Fed) announced on March 15, 2020, its intention to purchase billions of dollars in government bonds and mortgage-backed securities from domestic financial institutions—a policy known as quantitative easing (QE). (Source: Federal Reserve Bank of New York)
Recently, Fed Chair Jerome Powell announced that the US central bank will accelerate the taper of its stimulus spending to combat the high levels of inflation. Many project the Fed will conclude open market asset purchases by the end of March 2022. The Fed’s change in focus from accommodation to fighting inflation is currently priced by the market as three separate quarter-point rate hikes in 2022. The result may well lead to slower growth, with or without supply-chain challenges improving in 2022.
Inflation is one of the greatest concerns that can create problems economically, for businesses and consumers alike. Businesses have been able to pass most price increases onto consumers so far. Meanwhile, the still-tight labor market and resulting demand for wage increases have allowed the consumer to partially offset ballooning expenses—but this balance is fragile at best.
Consumer prices rose 0.5% in December 2021 pushing the US inflation rate to a 40-year high of 7%, indicating inflation is likely to persist well into 2022. (Source: MarketWatch.com)
Inflation will be a challenge to temper in 2022 given the record levels of stimulus, workforce seesaws, and the continued supply-chain disruptions that have created difficulties for getting goods and services to market. Roehl & Yi expects inflation to persist in the months to come, then subside closer to longer-term trends.
Since 1957, dividends for the S&P 500 Index have grown by an average of 5.7% annually, more than 2% higher than the rate of inflation. We believe owning quality stocks at attractive valuations remains a prudent way for investors to hedge against long-term inflation.
Roehl & Yi’s Final Thoughts
Looking ahead, earnings growth rates will likely normalize relative to the trend rates of the last several years. Demand for goods and services is still strong and should remain high in 2022. Consensus estimates provided by Zacks Investment Research project slowing but still-strong S&P 500 Index earnings growth for the next two years (8.4% in 2022 and 9.5% in 2023).
While S&P 500 Index valuations remain elevated relative to historical averages, the high level of earnings growth could potentially offset valuations moving lower and provide a modestly positive return for the equity index.
The R&Y Promise
Roehl & Yi has made a commitment to delivering more value through enhanced client engagement, new educational videos, resource-filled emails, and more.
As always, we are grateful for your continued trust in Roehl & Yi, and we ask that your first phone call be to us if you have any questions or concerns about your investments. May you and your family experience happiness and good health in 2022.