Market Commentary – January 2022

With inflation continuing to rise we would normally begin our commentary with a quote about its’ impact on individuals, companies, and portfolios.  Since we did that last quarter and turned out to be clairvoyant forgive us if we try something a little different. Famous investor Sir John Templeton stated in a 1933 publication “The four most dangerous words in investing are, it’s different this time.”   Investors were often caught mumbling something similar in 2000 and 2007 just prior to market tops.  Apparently, we could attribute Sir John’s statement to Jerome Powell, Janet Yellin and President Biden given their determination to convince us that current inflation is “transitory”. (it’s different this time!)

Despite the inflationary pressure, disappointing job numbers and supply chain constraints the S&P 500 finished 2021 with a Santa rally and a gain of 28.7% for the year. Who said really low interest rates and a more than 25% increase in the money supply wouldn’t boost the markets? (it’s different this time!)  The S&P 500 has now been positive 16 of the last 19 years and 40 of the last 50 years.  That folks is a great batting average and should convince those who still need convincing that a little fortitude in the face of a volatile market will be rewarded long-term

Other than the emerging markets index (see China) all major domestic and foreign indices were positive in 2021.  Large companies outperformed their smaller brethren and domestic companies beat their foreign peer group again.  Over the last 10-year period the S&P 500 index has earned more than 9% per year against the broad foreign index.  While there are positives to investment diversification excess allocations to foreign funds have cost investors significant performance the last decade.

Turning to bonds 2021 was another year of proving the old saying everything is uglier up close. The aggregate bond index returned -1.5% leaving investors empty handed if relying on their bond returns to finance anything more than a couple of aspirins for their fixed income induced migraine. The multi-year period of low rates has caused substantial damage to fixed income investors and pension funds that rely on the actuarial assumption they will earn a return above inflation from their bonds investments. Given this has not held true some multi-billion-dollar underfunded pension plans are allocating even more assets to the stock market and private equity investments. (it’s different this time!)

Inflation protected bonds earned competitive returns in 2021 despite many “knowledgeable” investment columnists writing about the fear of negative yields. For adventurous bond investors high yield offerings did well and as a result trade near historic low premiums compared to their treasury bond peer. We will stick to the inflation protected bonds issued by the U.S. Government thank you. Potential future rate increases in 2022 by Mr. Powell may take a larger bite out of bond returns and make us remember the good old days (2021) when the bond index was only down 1.5% for the year!

In inflationary periods commodities have often protected investor purchasing power and portfolio values.  The past year proved this to be the case. Commodities led by oil, natural gas, and agriculture all experienced increases.  Many funds invested in a broad basket of commodities returned north of 20% the past year. In times like these pairing quality and shorter maturity bonds with commodity exposure can help boost returns without taking on outsized risk.

Stock and bond markets always offer some opportunities for those willing to dig and at times take a contrarian position.  Despite inflation, the latest virus mutation and labor shortages (free government money) there will be opportunities for investors in 2022.  The great military leader General George S. Patton was not known as portfolio strategist, but he may have been on to something when said “If everyone is thinking alike, then somebody isn’t thinking”.   We will continue to look for opportunities rather than follow the herd.  It’s different this time!  Maybe.