fbpx Skip to main navigation Skip to content

At the end of Q3, we saw markets responding to fears around the delta variant, the political discussions around the debt ceiling, and inflation. Over the 4th quarter, we saw many of these fears wane – particularly those concerning the debt ceiling – while others were overwhelmed by strong corporate earnings growth. As inflation continued to run well ahead of central bank targets, markets are now forced to deal with the impact of a combination of high inflation alongside policy tightening from the Fed. That combination created a continuation of the weakness we’ve seen all year from fixed income. Commodities, which were the best performing asset class at the end of Q3, pulled back at the end of November along with global equities but have not regained ground. Coronavirus concerns continued to make headlines and created the aforementioned volatility towards the end of November, as the omicron variant emerged. However, as data increasingly showed the rapid rise in case counts not having the same impact on hospitalizations and fatalities as previous waves, developed markets calmed and ended the quarter positively.

Q4 and Historic Asset Class Returns:

Source: https://am.jpmorgan.com/gb/en/asset-management/per/insights/market-insights/market-updates/monthly-market-review/

Outlook & Risks:
Inflation and central bank response are the top risks heading into 2022. Central banks’ management around the recession as well as its recovery has prioritized employment over price stability in a way that significantly diverges from historical policy response. Even with the Fed signaling policy tightening in December, overall monetary policy is still relatively accommodative, especially true when compared against history.

The Fed is almost certainly correct that commodities, supply chain disruptions, and changes in corporate inventory management – many of the main drivers of inflation in 2021 – will eventually normalize; however, labor market tightness has driven up wages that could create more sustained inflation pressures. Even market participants that generally align with the Fed’s view that inflationary pressures will wane as supply chain disruptions lessen, still expect inflation to continue to rise throughout Q1 of 2022 and generally don’t expect normal levels until the latter half of 2022.

Despite these risks, it still seems unlikely that equities will underperform bonds in 2022. Equities have tailwinds from above-trend economic growth, solid earnings growth, and generally accommodative monetary policy. The strong growth outlook should put some pressure on fixed income that will be exacerbated by rate increases. Outside of those two major asset classes, there is a lot less to be comfortable projecting. Economic growth should be generally positive for cyclical and value stocks, which would lead you to think non-U.S. equities – which are more heavily weighted to those sectors – would outperform in 2022. However, 2021 had very similar dynamics, and while that did lead value to outperform growth, the U.S. continued to outperform non-U.S. equities. So, while these areas of the market look cheap on a valuation basis relative to U.S. markets, it is hard to have a substantial degree of certainty around that view. This reinforces the value of appropriately diversified portfolios that are less reliant on the accuracy of such projections.

In Q4, the Investment Committee made several manager and allocation changes based on our outlook. In summary:

  • Sold one of our traditional fixed income funds and added the Stoneridge Diversified Alternatives Fund to try to capture lower risk returns without as much exposure to inflation and rising interest rates.
  • Reduced exposure to U.S. growth stocks. Proceeds were invested in a U.S. multi-cap ETF.
  • Sold a portion of JP Morgan’s tactical manager and added a small exposure to a Crypto currency index. Based on our research, we believe this is an emerging and volatile technology that will continue to grow and impact many “legacy” business models.
  • An emerging market structured note matured with a strong, positive return. Proceeds were reinvested in a Vanguard Total World Stock ETF for low-cost, tax-efficient stock exposure.
  • For clients with taxable accounts, we took advantage of tax-loss harvesting strategies in late December.

As always, we are grateful for your continued trust in all we do related to planning and investments.