January 20, 2022

A new year has arrived, along with renewed hope and determination for a better future. Our thoughts are with those grappling with the physical, social, and emotional effects of the current surge in Covid-19 cases.

Looking back on the past year from an economic and investment perspective, 2021 provided robust economic growth and strong gains in the U.S. stock market. While the pandemic continues, its impact on the economy has diminished. Between widespread vaccination and previous infections, most of the U.S. population has some immune defense, and businesses have largely adapted to working around the pandemic. Unfortunately, the current dramatic surge in cases from the Omicron variant will likely produce a mild economic impact to begin 2022. However, the resilience of the stock market shows that most expect the effects of Omicron to be short-lived, and we agree.

The federal government added $5.3 trillion to the economy over the last two years. Given signs that the economy has nearly recovered, the unprecedented interventions that were taken in response to the pandemic to support markets and the economy are expected to recede. The economy will need to stand on its own legs, and we anticipate GDP growth will revert to its pre-pandemic trend of 1.5-2%. Additional stimulus spending on infrastructure, childcare, education, and other initiatives has met political deadlock. Should legislation for new stimulus pass, the scope of support will be much more muted, and the spending stretched out over a longer timeframe.

A strong labor market and continuing inflationary pressures have prompted the Federal Reserve to accelerate tapering their purchases of bonds. If this trend continues, bond purchases by the Fed will conclude by March 2022. A less accommodative Fed, combined with rising inflation, will likely cause interest rates to move higher this year. Interest rates have already started to increase, but yields are still very low, especially when compared to the high rate of inflation. We are keeping bond maturities short so we can be nimble in the evolving fixed income landscape, and we remain hypersensitive to quality, believing that only very modest levels of credit risk should be taken in the fixed income segment of a portfolio. We continue to view bonds as a capital preservation tool to increase income and provide portfolio stability.

The S&P 500 Index reached new all-time highs at the end of the year, although it was not a completely smooth road. Volatility stemmed from macroeconomic concerns around rising interest rates and increasing costs of labor and goods – headwinds to corporate America that contribute to slowing corporate profit growth. The total return (with dividends reinvested) for the S&P 500 was 28.7% through the end of 2021. However, these returns were unevenly distributed, as the most speculative stocks experienced sharp losses during the fourth quarter. Looking back over the past ten years, the market has risen at an impressive 16.5% annual pace, which is nearly double the 20-year historical total return average of 9.5%. The long bull market has acclimated investors to outsized U.S. stock market returns, with the market currently being priced for high future economic growth. However, we note that the U.S. is a mature, developed economy. We do not know how long the upward trend in stock market returns will continue, but at some point, we expect regression to the mean.

Against this investment backdrop, we remain committed to protecting and growing our clients’ capital through appropriate diversification (driven by individual investment goals and risk tolerance) and a persistent focus on quality investments at attractive prices. Our research process helps us identify high-quality businesses with stable, superior returns on capital, low debt, exceptional management teams, and products and services in expanding markets.

It is our pleasure to work with our clients and apply our best thinking to their portfolios and plans, which are tailored to each client's unique needs. 

The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.

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