By: Matt Garrott

What Happened in 2021

US stocks did very well while International stocks climbed but lagged the US.  The Barclays Aggregate Bond Index was down slightly, but Municipal Bonds and TIPS were up.  Even though a moderate portfolio likely had a higher return than the historical average for US Large Cap stock returns, diversified investors may be feeling FOMO (Fear Of Missing Out) after 2021.  The S&P 500 gained 28.7%, including dividends.  Scorching hot trades including cryptocurrencies, SPACs, NFTs, and IPOs dominated headlines.

Warren Buffett warns investors away from these FOMO trades.  He says there’s nothing worse than when your neighbor – who you know you’re smarter than – is doing better than you.  Flash in the pan investment schemes can spark jealousy, but usually fizzle out quickly.  No one is bragging today about the cannabis investments they made in 2018.

2021 was expected to be a stock picker’s market during a year filled with the disruptions and uncertainties of the pandemic.  Like most years, however, active management lagged.  The S&P 500 beat 81% of active large cap blend managers during the calendar year, 82% of active managers over the previous 3 years, 88% over the previous 5 years, and 87% over the last 10 years.

Inflation hit 6.9%, a mark not seen since 1982.  Back then, John Mellencamp was John Cougar (he switched to John Cougar Mellencamp in 1983, then John Mellencamp in 1991) and his little ditty about Jack and Diane hit the radio.  E.T. and Tootsie were playing at the theater.  I had a head full of curly, golden hair.

Eddy Elfenbein posted a joke on Twitter about a guy who was complaining to an economist that filling up his truck with gas cost too much.  The economist responded that it didn’t cost too much or he wouldn’t have filled up.  Ok, economics and jokes don’t really go together, but downplaying inflation has been a misstep from our political and economic leaders.  The Federal Reserve has finally announced that it will taper its bond purchases, ending the program in March 2022.  It then expects to raise rates which should provide some downward pressure on inflation.

Buzzwords:  COVID-19, NFT, Pandemic, Squid Game, Delta, SPAC, Omicron, Inflation, Vaccine, “Great Resignation”

Outlook for 2022

The Federal Reserve is expected to kick off a period of tightening with its “Turbo Taper”.  The market expects 2 or 3 rate hikes to follow.  There are other tightening factors as well.  Will student loan and mortgage payments resume or will forbearance be further extended?  The average student loan payment is $393/month.  The pause in payments has acted as stimulus on top of checks in the mail.  Also delayed is a potential Build Back Better Bill along with an extension of the child tax credit monthly payment.

Some inflation is expected to remain stubborn while some resolves.  Energy and automobile prices are expected to remain steady or fall as supply chains normalize.  The stickier inflation of wage growth and housing prices may take longer to unwind.

As the Federal Reserve’s taper and tightening campaign lowers the tide of liquidity, we may see who’s been swimming naked, to borrow another Buffett-ism.  Meme stocks and crypto-assets are also getting a hard look from the SEC, particularly “gamification” of trading on certain apps and payment for order flow on those apps.  New rules may be coming for SPACs and possibly standards around funds being able to call themselves “green” or “sustainable”.

Midterm elections are this year.  The first rule on investing based on elections: Don’t let your feelings about politics dictate how you invest.  The second rule: DON’T LET YOUR FEELINGS ON POLITICS DICTATE HOW YOU INVEST.

Predictions are more marketing than analysis.  The forecasting horse race happens every year and if anyone bothered to check, the experts are usually way off.  Some firms have found a way around this: have multiple employees make predictions.  Whoever gets closest is paraded around the media as evidence of the firm’s market savvy.  You will probably hear that we are about to hit a period of elevated uncertainty.  When was the last time you saw a headline anticipating elevated certainty, though?  Never.

There is one evergreen certainty for the markets: financial salespeople want you to put your money in motion.

Annual predictions often focus on what will change in the coming year, but it can be more valuable to recognize what isn’t changing.  Rebalancing and tax loss harvesting will continue to serve investors well.  Be mindful of taxes, especially when anyone suggests you put your money in motion. Chasing yield or returns will increase the odds of an unforced investment error.  Investors should say no (or have us say it) more often than they say yes to pitches.  Just like every other year, Wall Street expects 2022 to be a stock picker’s market.  Just like every other year, we suggest ignoring the sales pitch and sticking with what works over the long-term. Control costs, manage taxes, and most importantly, stick to and execute on your individualized financial plan.

If you request that we move money via wire transfer, expect a phone call from us to confirm.  Scams are getting more sophisticated.  The best way to protect our clients is to obtain a verbal confirmation.

Despite significant progress, the news surrounding the pandemic is unrelenting and consistently negative.  As usual, we will be reaching out to you throughout the year, but if you feel the urge to pick up the phone and talk about literally anything other than COVID, we are here.  Retirement goals are being hit.  People are getting married.  Babies are being born.  We want to hear about it.  It’s easier than ever to fall into social media or the news cycle and forget that there are reasons to celebrate and there are people to share those triumphs with.

We are thankful and humbled by the support and kindness we’ve received from our clients this year. We promise to deliver on our core values: Integrity, Service, Reliability, Insight, Excellence, and Results.

Fairway Scorecard 12-31-2021