01/2022 - Year In Review
You and I are long‐term, goal‐focused, plan‐driven equity investors. We believe that the key to lifetime success in equity investing is to act continuously on a specific, written plan. Likewise, we believe substandard returns and even investment failure proceed inevitably from reacting to (let alone trying to anticipate) current economic/market events. We are convinced that the economy cannot be consistently forecast, nor the markets consistently timed. Therefore, we believe that the only reliable way to capture the full long‐term return of equities is to ride out their frequent but historically always temporary declines. Just in the last few decades or so, the average calendar year price decline from a peak to a trough in the S&P 500 exceeded 14%. One year in five, the decline has averaged at about twice that. Furthermore, on two occasions (in 2000‐02 and 2007‐09), the Index has actually halved. Yet the S&P 500 came into 1992 at 435, and went out of 2021 at 4,766; over those 30 years, its average annual compound rate of total return (that is, with dividends reinvested) was more than 10%.1 These data underscore my conviction that the essential challenge to long‐term successful equity investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines. These principles will continue to govern the essentially behavioral nature of my advice to you in the coming year…and beyond.
From my perspective, the story for 2021 was inflation. A perfect storm of too much money available to folks and a supply shortage of goods. The backyard patio that my wife suggested we build in 2019, has not only increased in price for the materials, but our grill, that was purchased & paid for this last July, has still not been delivered to our house. The used car I purchased for my son to bring to college could have been sold for 30% more than our purchase price after just 6 months. (You bet we thought about booking those profits.) The economist, Brian Wesbury at First Trust, states that inflation was 7% last year. Even the U.S. postage stamp increased to 58 cents. Inflation matters. In our lifetimes, I believe it is the biggest threat to our lifestyle. In other words, whatever rate of return you had on all your money in 2021, subtract 7%, to calculate the “REAL” rate of return. Sure, equities were generally positive, just not as much. Bonds and cash, on the other hand, most likely negative returns after inflation. Although inflation is invisible to your bank account, it will be felt when the money does not buy you as much as it has in the past.
It seems to me to be counterproductive to look at these past 12 months in isolation. They were, rather, the second act of a drama that began early in 2020, the precipitant of which was the greatest global public health crisis in a hundred years. The world elected to respond to the onset of the pandemic essentially by shutting down the global economy— placing it, if you will, in a kind of medically induced coma. In this country, we experienced the fastest economic recession ever, and a one‐third decline in the S&P 500 in just 33 days2. Congress and the Federal Reserve responded all but immediately with a wave of fiscal and monetary stimulus, which was and remains without historical precedent. This point cannot be overstressed: we are in the midst of a fiscal and particularly a monetary experiment, which has no direct antecedents. This renders all economic forecasting—and all investment policy based on such forecasts—hugely speculative. I infer from this that if there were ever a time to just put our heads down and work our investment plan—ignoring the noise—this is surely it.
If 2020 was the year of the virus, 2021 was the year of the vaccines. Vaccination as well as acquired natural immunity are in the ascendancy, regardless of how many more Greek‐letter variants are discovered and trumpeted to the skies as the new apocalypse. This fact, it seems to me, is the key to a coherent view of 2022.
In general, I think it most likely that in the coming year (a) the lethality of the virus continues to wane, (b) the world economy continues to reopen, (c) corporate earnings continue to advance, (d) the Federal Reserve begins draining excess liquidity from the banking system, with some resultant increase in interest rates, (e) taxes, geopolitics, inflation & midterm elections will be a significant worry, and (f) equity prices will be volatile – providing a future return something less (and probably a lot less) than the blazing pace at which they have been soaring. Please do not mistake this for a forecast. All I said, and now say again, is that these outcomes seem to me more likely than not. I am fully prepared to be wrong on any or all of the above points. If and when I am, my recommendations to you will be unaffected, since our investment policy is driven entirely by the plan we have made, and not at all by current events.
With that out of the way, allow me to offer a more personal observation. To wit: these have undoubtedly been the two most shocking and terrifying years for investors since the Global Financial Crisis of 2008‐ 09—first the outbreak of the pandemic, next the bitterly partisan election, then the pandemic’s second major wave, and most recently a 40‐year inflation spike. You might not be human if you have not experienced serious volatility fatigue at some point. I know I have. But like that earlier episode, what came to matter most was not what the economy or the markets did, but what the investor himself/herself did. If the investor fled the equity market during either crisis—or, heaven forbid, both—his/her investment results seem unlikely ever to have recovered. If on the other hand
he/she kept acting on a long‐term plan rather than reacting to current events, generally positive outcomes followed. It was ever thus. I expect it always will be. As always, I welcome your comments, questions and concerns. One of our motto’s is “We can’t predict, but we can prepare”.
As always, thank you for being my clients. It is a privilege to serve you.
Brian A. Magnan, CFP®, AIF®
Director
PS. For your viewing pleasure, I have attached our updated quilt chart that displays the rate of return of the different classes of investments ranked from best (top) to worst (bottom) for each calendar year going back to 2007. My favorite for explaining diversification.
Sources: Standard & Poor’s; Yahoo Finance; J.P. Morgan Asset Management “Guide to the Markets” (p. 16); S&P 500 Return Calculator with Dividend Reinvestment, DQYDJ.com
1https://www.ftportfolios.com/Commentary/EconomicResearch/2022/1/18/who‐gets‐the‐blame‐for‐
inflation
2https://grow.acorns.com/2020‐bear‐market‐charts/
http://www.mooncap.com/wp‐content/uploads/2016/04/bear‐markets‐Mar2016.pdf
https://finance.yahoo.com/quote/%5EGSPC/history? period1=1579824000&period2=1611446400&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true
The views expressed by Brian Magnan are his own and do not necessarily reflect the opinion of Well Fargo Advisors or its affiliates.