Taking Off The Training Wheels

By The Lerner Group on January 4, 2022

2021 proved to be a year of significant growth and recovery reflected in financial markets and the overall economy. GDP reached a record $23.2 trillion, and major equity indexes recorded numerous records as businesses adapted to our “new normal.” The United States performed exceptionally well compared to the rest of the world, given the vaccine roll-out and availability. In recent years, we’ve seen underperformance in international stocks, but this may be the year in which that trend changes as the rest of the world catches up. Looking ahead to 2022, we see continued opportunity in equity markets as supply chains normalize and the Federal Reserve shifts more of its focus to combatting inflation.

Over the last 12 months, the S&P 500 logged 70 record closes, finishing the year up nearly 27%. The returns were primarily driven by value sectors, including Energy, Real Estate, and Financials. Investors favored companies with strong cash-flows, the ability to pass on pricing increases, and assets that benefit from inflation. High dividend stocks check the criteria listed above and provide additional protection to purchasing power resulting in a 21% return[1]. Despite our strong outperformance in the bond market (4.1% vs. -1.8%[2] ), inflation of nearly 7% eroded purchasing power. Once interest rates rise, bonds may once again be more attractive.

Elevated inflation, strong demand for housing, and rising interest rates emerged as key trends in 2021 and are expected to continue this year. Looking ahead, we see that inflationary pressures will persist in the first half of the year, driven by record increases in pay, bonuses, and Social Security that will put more money into consumers’ pockets. State and Local Governments have passed budgets 9.3% higher than 2021, which could provide additional demand for goods and services. These inflationary pressures can incentivize the Federal Reserve to be more aggressive in tapering their balance sheet and raising rates, contributing to increased housing demand before rates rise. We’ll be monitoring high valuation growth companies that are typically impacted in a rising rate environment and possibly need to be re-evaluated.

With all of the factors influencing financial markets, it is important for us to look around corners and identify potential areas of concern. In 2022, geopolitical challenges could arise from Russia and China’s aggressive stance in relation to their neighbors. If a conflict arises, defense and defensive stocks will provide some protection to investors. On the domestic side, 2022 will be an election year that will shape Congress until 2024. The outcome of the elections could impact future fiscal and tax proposals, and this uncertainty could lead to businesses delaying investment decisions, which could slow growth.  

In 2022 balance and patience will be key. Many of the families we work with have taken time to reassess their financial situation and will continue to do so in the year ahead. The market success we have all been fortunate to enjoy has raised important questions about the right amount of wealth to retire. As we enter the new year, this is an excellent opportunity to review financial plans, update expectations, and plan for the future. If you would like to spend some time discussing your financial plan, portfolio allocation, and estate strategy, please reach out to schedule a time to meet. 

We want to wish everyone a safe and Happy New Year! 

[1] Past performance is no guarantee of future results.

[2] Based on Barclays aggregate bond index performance.