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4th Quarter 2021 - Economic Update

2021 closed as a banner year for many investors. Although history will record the Covid pandemic for causing one of the sharpest recessions ever felt by the global economy, the rebound investors continue to see nearly two years later has been just as remarkable. Post-pandemic equity markets in 2021 saw the S&P 500 create 70 record closes, the last one on Wednesday, December 29. The DJIA also realized 45 record closes in 2021. (Source: Barron’s 12/31/21)

Stock valuations have soared in large part due to ultra-low interest rates and a healthy economic recovery. With a few exceptions like some bonds and gold, almost every asset class produced gains in 2021.­­ (Source: Barron’s 12/17/21)

Throughout the year equity markets showed perseverance and resilience against many potentially detrimental events and rewarded investors with notable gains, but investors still face continued variables that could affect the uptick of the economy and its recovery.

As we enter 2022, there are several areas that should play a key role in the economy and how it may affect investors. These include:

  • The trajectory of the COVID-19 pandemic recovery – hopefully we will not experience any newer emerging COVID variants and we will see a reduction of new cases.

  • The Federal Reserve’s tapering and ultimate goal of ending the pandemic-induced monetary stimulus.

  • The slowing down of global economic growth.

  • Rising interest rates.

  • Inflation rates that could remain elevated.

These and a variety of economic factors could complicate equity market performance in 2022, so investors need to be prepared.

Inflation & Interest Rates

Interest rates and inflation concerns continue to be at the forefront of the economic news, especially after the Fed announced in December it will speed up its timeline for tapering down its stimulus.

In November, inflation statistics rose 6.8% versus the preceding twelve months. This was the fastest rise in inflation since 1982. The consumer price index also soared and settled at a 6.8% pace, also the fastest since 1982. (Source: 12/10/2021)

Several factors have contributed to a swift elevation of inflation, including the imbalance of the supply and demand chain and the reopening of the economy. The Fed expects that supply chain bottlenecks and shortages will continue well into 2022.

With the annual consumer price index rising faster than ever since the early 1980s, high inflation can pose significant hardships for many individuals and families. The Federal Open Market Committee (FOMC) stressed that it is “committed to our price stability goal” and is ready to use “tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”

Interest rates and tapering are currently closely connected. Even though 2022, is forecasted to bring slightly higher rates, at the conclusion of the Federal Reserve’s meeting in December, the Federal Open Market Committee (FOMC) kept the federal funds rate at or near zero (0 – 0.25%). The median forecast of FOMC members is three quarter-point rate increases in 2022 and three more in 2023, which would raise rates to 2.1% at the end of 2024. Powell expressed that this was all predicated on the forward movement of the economy and would be “prepared to adjust the pace of purchases “ if warranted.

As your financial professional, we are committed to keeping a watchful eye on the economy and how interest rate hikes and the trajectory of inflation affects our clients. If you are concerned about how these key items could affect you, please connect with us to discuss possible hedges against inflation and rising rates.

Treasury Yields

2021 was a lackluster year for bond holders. While today’s interest rates are still historically low, as we stated earlier, the Fed is expecting to raise interest rates several times in the next two years. When interest rates rise, the demand for bonds typically falls, reducing their prices and raising their yields. Thus, 2022 may see a slightly better performance from bonds.

The 10-year Treasury yield finished the quarter at 1.52%. According to Russell Investment’s research, a 1.5% to 2.0% yield on 10-year U.S. Treasuries is expected by the end of 2022

We are monitoring interest rates movements and their effect of bond yields. Investors should remember that bonds can be a critical component to a diversified portfolio. Bonds can be a good shield from volatility in equities and provide income. However, investors who put a high percentage of their portfolios in bonds with the hopes of producing stable

Investors Outlook

As the calendar turns to 2022, it provides an opportune time to reflect on longer-term horizons, your risk appetite, and adjustments in your cash flow needs..

Rising interest rates and the course of inflation will be at the top of analyst’s and investor’s watch lists. The Fed’s expectation of raising interest rates several times next year and tapering off the pandemic stimulus, combined with other variables, including the potential decline in corporate earnings, supply chain issues, and continued concern over COVID variants, could lead to increased volatility in equity markets.

Investors are not out of the woods from COVID and its effects on the economy. Omicron introduced itself to the world in late November and equity markets reminded us that they are still vulnerable to the coronavirus. The DJIA responded with its worst day since October 2020 and the S&P500 had its worst performance since February 2021. However, the markets quickly rebounded.

While investors enjoyed an overall strong return in 2021, as the monthly S&P 500 returns chart shows, monthly returns were very inconsistent. Even though the equity markets have been rewarding, complacency should not settle into investor’s attitudes toward their investment strategies. We still stand by our mantra of “Proceed with Caution.”

Many economists are still looking at continued favorable returns in 2022, but in more moderation. We favor longer-term investment horizons as shortterm movements of the market are unpredictable and do not abide by any average. Although historically, stocks have provided higher long-term returns than bonds or short-term investments, stock prices do not move in a straight line.

Remember, market pullbacks are not uncommon and can offer a healthy “reset” for high stock valuations. Often times, pullbacks can provide opportunities for entry points, not exit points. Staying away from emotional investing decisions can help investors ride the pullback waves and stay on track toward their financial goals.

With interest rates hikes on the horizon, we suggest you consider:

  • reviewing all of your income-producing investments.

  • locking in your mortgage rates

  • maintaining liquidity for all near-term needs.

  • connecting with us to review your personal financial plan, including risk management.

Regardless of how equities are performing, investors should always focus on their personal objectives and long-term goals. Even when investing for the longterm, there is no guarantee that market volatility will decrease, stabilize, or increase over any timeframe.

Having a solid investment strategy is an integral part of a well-devised, holistic financial plan. Staying disciplined and following that strategy during times of volatility is equally important. As your financial professional, we are here to help you with your goals. We treat each client as an individual case with unique goals and circumstances. Prior to making any financial decisions, we highly recommend you contact us so we can help determine the best strategy. There are often other factors to consider, including tax ramifications, increased risk, and time horizon fluctuations when changing anything in your financial plan. As always, please feel free to connect with us with via telephone or email with any concerns or questions you may have.


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