Q4 2021 Client Commentary
Well, I never would’ve figured this one out. October started with the prospect of spooky ghouls, negative sentiment, and the headwinds of inflation and more partisan fighting. We then went on to be thankful that the month of November ended without further damage to the market. This is the fun part of the quarter where Omicron came on the scene, threatened the business climate with more global shut downs and poor earnings, and then, to everyone’s surprise ended the year with a Santa Claus rally. People who try to predict the market are up against virtually impossible odds. This is why A.G. Campbell Advisory looks at the market like a market full of stocks, not a stock market. The distinction is important. The year ended with the S&P500 index up 26.89% for the year and beach-based real estate values only continuing to soar out of sight.
Okay, enough about what was. 2022 has begun with more obvious supply chain shortages, but there is beginning to be more talk of coronavirus becoming endemic verses the current pandemic. Many think it will become similar to the flu. The current economy is pretty good. The wage increases seem to be sticky and unemployment is still very low; however, there are storm clouds in view. Inflation has run so hot for so long that many Americans are questioning the fiscal soundness of more stimulus, whether for infrastructure or not. Cheap money has been here for a long time, and this inflationary period is seeming to be more than transitory. The Federal Reserve is obviously one of the big market headwinds right now because they are having to walk a fine line. On the one hand, they have all but ignored thus far many of the obvious inflationary pressures. Prices have increased significantly in many areas important to our society: used cars, energy, food, and transportation. This could present headwinds, especially when government spending continues to push the national debt higher, and we owe trillions of dollars as a nation. On the other hand, if the Fed pushes rates up too far, the government won’t be able to meet the interest payments on our debt promissory notes. Remember, a few years ago the rating agencies took us from a AAA rating to AA. Wonder what interest rates would be if we became a single A rating? Higher for certain. So, the Fed is not in an enviable position. However, there are 3 reasons to remain optimistic: one, no one in the entire world benefits from the United States’ currency being declared insolvent. It’s just as bad for them as it would be for us. Two, the consumer is in great shape. He or she has stored up their money in the pandemic and is spending. That’s positive, but it doesn’t help price inflation or empty grocery shelves. A strong consumer often keeps economic forces in check for a little while. Three, we have mid-term elections this year, so it’s in neither party’s best interest to have a weak U.S. economy.
Now, what the heck do we do with that? Do we run to cash? The succinct answer is no. Forward corporate earnings look good, and these companies can help us keep up with inflation. It’s only when it becomes hyperinflation that this concept doesn’t hold true. Where else are you going to put your money? Bonds? Not likely. That’s an area that is waiting to correct in a big way and the interest is so negligible, it doesn’t move the needle for most of us. What about money markets, gold, land, or digital currency? We believe money markets are no more than a place to hold cash earmarked for future needs or investment opportunities. Gold and land may have been good hiding places in the 1970’s inflationary period, but neither of those are easily obtainable at a reasonable price today. We do believe that most people should have 2-3 % in alternatives, and there is electronic gold today. Finally, digital currency is anybody’s guess. While it’s most likely here to stay, valuations can be very volatile. This year is already marked by a lot of volatility. Therefore, we are advising staying invested in the equity markets relative to your objectives and risk parameters, and diversify by market capitalization and geography. Have 15-25% cash on hand to take advantage of some discounts in the future, and hold fast to that which is good. Keep a higher percentage of dividend paying stocks. This year, we are most interested in financials, and energy.
May you all have the happiest of new year’s, and we are ready to meet all your questions and challenges that this environment brings.