Many people use the new year to establish New Year’s resolutions. While I have never been big on resolutions, I am a sucker for Top 10 lists. Therefore, I thought it might be fun to do something different this quarter with a couple of Top 10 lists. First, let us look back at the top stories that shaped the economy and the investment markets in 2021.
Top 10 Stories of 2021
- The Georgia Bulldogs won the National Championship – While this had no direct bearing on the markets (and technically happened in 2022), if you know me at all, you should have known this would make the list.
- COVID-19 – Thankfully, vaccines and less virulent strains led to a decrease in hospitalization and death rates, but COVID-19 still created significant economic headwinds.
- Inflation – Inflation registered at 7% annualized from December 2020 to December 2021. This was the highest reading in 30 years. High inflation is a drag on the economy as consumers have less disposable income.
- Spending Bills – The infrastructure bill passed through congress, but the Build Back Better bill did not (as of January 2022). Government spending is usually seen as a positive for the markets, at least in the short term.
- Interest Rates – Interest rates were at historic lows for most of 2021. While this is great news for borrowers, it lessens fixed-income returns.
- Growth vs. Value Investing – For only the third time since 2003, value stocks (think Proctor & Gamble, Exxon, Johnson & Johnson) outperformed growth stocks (think Apple, Amazon, Facebook). Large Cap Value stocks returned 26.08%, while Large Cap Growth stocks returned 21.90%.*
- Large Cap vs. Small-Cap Investing – As has been the case since 2016, Large Cap stocks (companies with a market capitalization over $10 billion) outperformed Small Cap stocks (companies with a market capitalization under $2 billion) 26.68% vs. 23.55%, respectively.*
- Domestic vs. International Investing – Only twice in the last ten years have international stocks outperformed U.S stocks, and 2021 was no different. U.S. stocks returned 26.68%, and international stocks returned 10.15%.*
- International Conflicts – The world will never be without conflicts, but all told, 2021 was pretty quiet, until late in the year when tensions started to rise between Russia and Ukraine. This was a positive for the markets.
- Atlanta Braves – Won the World Series. Need I say more?
We can see in the list above that some long-term trends were broken. The Braves and the UGA Dawgs finally won titles, and value investing outperformed growth investing. As you will notice on the 2022 Preview List below, some major themes are still with us in 2022.
Top 10 Previews of 2022
- COVID-19 – Last summer, the Delta variant was a setback, and once we emerged, there was Omicron. There’s hope that 2022 is the year when normalcy returns, sending travel, commercial real estate, and traditional retail stocks even higher. This return to normalcy will largely depend on new variants that emerge and the public’s willingness to go about everyday life in the face of them.
- Federal Reserve (Fed) – Traditionally, stocks do well when interest rates are low. Most economists predict the Fed will begin to raise rates in 2022, but by how much? How quickly they increase will be vital to keeping positive momentum in the stock market.
- Inflation – You had to know this was going to appear again. Many economists hope that inflation will slow down as supply chain issues dissipate. If the current inflation trends aren’t reversed soon, there could be market turmoil.
- Supply Chain Issues – This will be a crucial dilemma to resolve before #3 becomes a problem that forces #2 to act more quickly than they would otherwise. This is a complex issue, and bigger solutions are needed than can be outlined here. However, Americans are questioning the wisdom and national security implications of buying and making nearly all our products overseas for the first time in a long time. That is good news for the markets.
- Job Market – The reported job numbers are impressive, with unemployment at 4.2%. The bigger question is, what lies beneath? In my own daily life, it appears many businesses are struggling to hire workers, cutting into productivity. A low unemployment number due to workers leaving the workforce is not a healthy labor market.
- Chips, Chips, Chips – Where are the Chips? The ongoing computer chip shortage will continue to impact stocks, not just tech stocks. Practically all consumer durable goods have a computer chip in them now, so the shortage affects more than laptops. Car producers are overflowing with almost-completed cars right now, just waiting for scarce computer chips to be installed.
- Midterm Elections – A big uncertainty of 2022 is the midterm Congressional elections. Republicans are likely to do well, as the sitting president’s party usually loses seats in the midterms. As seems always to be the case, this election cycle will likely be partisan, contentious, and ugly. Elections always create unpredictability, instability, and an opportunity to spook the markets.
- Stock Valuations – International stocks are cheaper than U.S. stocks based on a price-to-earnings (P/E) ratio, which is a tool for valuing a company that measures its current stock price relative to its earnings per share. The forward-looking P/E ratio of U.S. stocks is 21.7, whereas international stocks are 15.5 and emerging markets stocks are 12.4. Based on this metric, international stocks are cheaper than U.S. stocks, which could present an opportunity to invest in non-U.S stocks.
- Fixed Income – Interest rates are increasing, but when and by how much is unclear. Investors could see existing fixed income holdings decline in value as this takes place, but interest received should increase in time.
- International Conflicts – A possible invasion of the Ukraine by Russia is beginning to rattle the markets. Regardless if Russia ends up invading, the threat from Russia and Putin is putting other countries in a difficult position.
Bonus: Will the Braves or Dawgs repeat?
There you have it—a look back and a look ahead. At Persium Group, we will continue to follow these themes as well as others that develop throughout the year and assess the impact on the economy and the markets. It would not be a surprise to see increased volatility, but this can create opportunity. To capitalize on this opportunity, investors must be following an appropriate asset allocation and rebalance when it is appropriate. As I close this quarter’s commentary, I leave you with two simple words: “Go Dawgs!”
*Numbers are for the median investment within that asset class.
The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.
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