- A Surprisingly Good Year. Despite a year marked by a confluence of events with no historical parallel, investment results for 2021 turned out to be a rewarding year for equity markets. Stocks closed out the year with solid gains, with large US companies once again pacing results. Fixed income markets finished slightly in the red, and gold dropped 4%.
- Strong Economy. Economic data continue to point toward improving cyclical activity, although supply and labor shortages pose a challenge to sustained progress. After the fourth quarter numbers are finalized, the economy should have grown in excess of 5% for the year. Growth is expected to moderate in 2022, but remain above trend.
- Omicron. According to CDC, the highly contagious omicron variant has overtaken delta in just a matter of weeks. Evidence thus far is suggesting that omicron is less severe than earlier variants, and correspondingly less lethal, particularly for vaccinated persons. Patients infected with the omicron variant may have increased immune protection against earlier strains, too. If omicron ends up displacing delta and indeed proves to have milder symptoms, the pandemic may finally prove much less disruptive to individuals and societies.
- Inflation. Inflation remains stubbornly high, spurred by the unusual restart dynamics of extraordinary demand meeting supply bottlenecks and wage pressures. The Consumer Price Index (CPI) readings from the past few months show that prices have surged by 6% – 7% on a year-over-year basis, their most rapid rate of increase since 1982.
- Supply Chain. Dislocations in global supply chains are present everywhere, from computer chips to supermarket food, largely brought on by covid-related factory interruptions and also transport and logistic bottlenecks. We continue to expect that most supply-demand imbalances will moderate from today’s elevated levels.
- Fed Taper. The central bank has firmly move into inflation-fighting mode. From the latest Fed minutes, Fed chair Jerome Powell charted a path for weaning the economy off the Fed’s pandemic support. The Fed voted to reduce its monthly bond purchases initiated during the onset of the pandemic, ending the program earlier than anticipated in March. The Fed is also expected to begin raising short-term interest rates following the cessation of its bond buying program.
- Market Outlook. Tighter monetary policies could contribute to episodic volatility in the markets, and present some possibilities for downside risk. In the aggregate, however, we believe the macro backdrop will like remain supportive of risk assets in 2022. The economic restart has room to run. Healthy household balance sheets, rising wages, and ample job opportunities place consumers in a position of relative strength. The first projects of the $1 trillion infrastructure spending package should begin to hit the economy, as well. We continue to chart our investment strategy in response to prevailing and expected conditions, and the opportunities they present.
