Investment Review for Fourth Quarter 2021

Risky asset returns.

While 2021 was a challenging year for many who struggled to return to work, school, and life in this post-COVID-19 world, it was not challenging for risky assets. Except for emerging markets, risky assets were up across the board. Global stocks as a group, rose 18.5% during the year, with domestic stocks outperforming and foreign stocks underperforming the broad index.

Major asset class returns.

Inflation. 

Tremendous amounts of stimulus, when combined with global supply chain issues, brought about the highest annual level of inflation this country has seen since the early 1980s. In total, prices rose 7.0% in 2021. While prices were up across numerous segments of the economy, some industries have been more affected than others. In particular, energy and auto prices rose significantly, but for different reasons. Oil prices fell sharply during the 2020 lockdown and came roaring back when people began returning to work and factories reopened. In contrast, the high cost of autos can be attributed to the lack of supply as manufacturers struggle to source necessary components to complete the production of cars, SUVs, and pickup trucks.

Earnings recovery. 

Following a difficult year in 2020, earnings were quite strong for U.S. companies in 2021. While 2021 earnings were spectacular, it is difficult to know how much of those earnings were attributed to accounting peculiarities vs. actual economic value creation.

As such, it can be helpful to analyze sales figures to give investors a better idea of the true growth of U.S. companies. Upon analysis of the most recent sales estimates, total goods and services produced by large U.S. companies appear to have increased approximately 9% in total over the past two years.

Job openings.  

There have been over 10 million job openings in the United States for the past six months. To put this in context, the Bureau of Labor Statistics has been keeping track of this number for roughly 20 years, and the previous high was 7.5 million in 2018.

The labor shortage is also highlighted in the separations data. The number of individuals quitting (or leaving for other voluntary reasons) reached an all-time high of 4.5 million for the month of November. In contrast, monthly layoffs & discharges initiated by employers, have remained below 1.4 million for the past four months. Like job openings, both the high amount of quits and low amount layoffs, are levels that have never been experienced in the 20+ years for which the information has been gathered.

When combined, the statistics continue to paint a favorable picture for those working, looking for work, or negotiating compensation.

Federal debt.   

From the signing of the U.S. Declaration of Independence in 1776, through the end of 2006, the U.S. accumulated approximately $8.5 trillion of debt over a 230-year period. Since that point, federal spending has outpaced receipts by approximately $1.4 trillion per year on average. Bringing our nation’s debt to roughly $30 trillion today.

On December 16th, President Biden signed a bill raising the nation’s debt ceiling by $2.5 trillion, to $31.4 trillion. While an incredibly large number, the recent increase is only expected to be sufficient through the 2022 midterm elections. As such, total U.S. federal debt will likely exceed $31.5 trillion by the end of this year. Unfortunately, the fiscal mismanagement of today is leading to an increasingly large problem that will likely be both difficult and painful to resolve at some point in the future.

Monetary policy shift. 

With record job openings, falling unemployment, and rising inflation, it is no surprise that Federal Reserve is signaling that interest rate increases are on the horizon. In fact, in December’s Summary of Economic Projections, committee members signaled that interest rates could rise three times in 2022 for a total increase of 0.75%.

In addition, investors, traders, and other market participants appear to be taking the message seriously. As of early January, financial market pricing data indicates a 70.3% probability of at least three interest rate hikes in 2022.