Telemus Weekly Market Review December 27th - December 31st, 2021
The 2022 Mindset
Within the market, 2021 can be considered a year of risk taking. Easy monetary policy and rapid improvements in economic conditions set the stage strong returns from higher risk assets such as commodities, high multiple stocks, high yield bonds, cryptocurrency and the new category of ‘meme’ stocks. The year concluded as the third consecutive year with roughly a 20% return for the S&P 500. For most investors, 2021 can be chalked up as a good year, with the lone black mark being bonds, which lost a modest -1.5%.
As we head into 2022, we expect to see a shift in the economic landscape as fiscal stimulus programs seem to have stalled out and the Fed has openly shifted toward a more restrictive policy of sunsetting its asset purchase program and preparing the market for a series of interest rate increases. The last few months of 2021 saw the market begin to react to this, however, we see the shift in sentiment and positioning continuing as we get further into 2022 once Fed expectations become reality.
How the market will play out given these shifting conditions is a bit unclear. History has yet to witness an environment where a central bank is winding down its quantitative easing program and starting a rising rate campaign while a pandemic continues to impair consumer and business activity. Saying exactly how market participants will react is not something we, nor anyone for that matter, can predict with precision.
Our comfort in the ability of investors to generate attractive long-term returns remains. The path of getting there, however, is less clear given a shift in economic policies and market conditions. As investors embark on 2022 we recommend a few strategies to help in navigating the year:
- Expect more volatility. Since bottoming out in March of 2020, stocks have had limited downside to them. The volatility within the market has largely been to the upside. It’s hard to complain about wild swings in asset prices if their values are going up. Remember that downside risk exists, and broad-based price declines will happen from time to time. Bracing yourself for a drawdown at some point is a reasonable expectation to have in any year.
- Don’t succumb to market averages. When looking at the broader market some have commented that the market may be overvalued. There are clearly pockets of stocks that appear to be expensive, while there are other segments of the market that appear more reasonable or even cheap. In fact, 2021 brought greater variation in returns creating more promising valuations and opportunities to certain segments of the market.
- Stay balanced. Every so often it’s good to reset your portfolio. Trimming back the top performers and adding to the laggards tends to help over the long-term. Case in point is energy. By far the worst performing sector within the S&P 500 index in 2020, it finished 2021 as the top performer.
- The start of a new calendar year doesn’t automatically change behavior. Outsized risk appetites carried through the entire year of 2021. We expect a greater awareness for risk as 2022 progresses, but to start the year some investors may continue to accept higher levels of risk.
- Focus on your objectives and investment horizon. Most of us aren’t investing with the sole purpose of maximizing the value of our portfolio on December 31, 2022. Thus, our portfolio shouldn’t be built to maximize our return for the next year, but to maximize the outcome over our investment horizon. As 2022 plays out, don’t get overconfident or become willing to take on too much risk if results are better than expected. The reverse holds as well if tighter economic conditions lead to a dip in returns.
We enter 2022 on an optimistic tone. The economy enters the year in a strong position, corporate earnings have never been stronger, and there is a diverse set of opportunities that exist across asset classes. We are, however, losing the tailwinds of favorable fiscal and monetary stimulus and facing a headwind of tighter monetary policy. This is likely to create a shift in market behaviors. In light of these alterations, we have to face 2022 with a degree of humility and risk consciousness knowing the playbook is changing, while recognizing that long-term fundamentals remain attractive.
All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. An index is not a security in which an investment can be made, as they are unmanaged vehicles that serve as market indicators only and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. Advisory services are only offered to clients or prospective clients where Telemus and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Telemus unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.
Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.