2021 Year in Review

Let’s Remember the Context
This can help us follow trends that may take many years, even decades to play out.  Without context, we can often become distracted by events and overreact to the important news of the day.  Now, more than ever, we need to consider context. 

Let’s Remember the Context

As an investor, it is always important to bear in mind context.  This can help us follow trends that may take many years, even decades to play out.  Without context, we can often become distracted by events and overreact to the important news of the day.  Now, more than ever, we need to consider context. 

2021 was a complex and busy year in which the uneven impact of the pandemic continued.  Depending upon your circumstances, this past year was a time of growth, or recovery, or grinding malaise.  The year saw adaptation and restructuring, often in clumsy fits.  We saw euphoria in the pricing of meme stocks, digital assets, and houses.  And we saw outbursts of rage and indignation as worldviews collided and bad actors faced consequences. 

Headlines about broad growth in US stock indexes tell an inadequate story because growth was concentrated into only a few large names.  Many sectors and companies underperformed on the year, and many highflying investments collapsed and went steeply negative.  In fact, a diversified portfolio performed worse than one with a narrow focus in the right sector – a circumstance unlikely to persist.

In the year ahead, the economy will most likely continue the process to strengthen and recover from the unprecedented convulsion of the pandemic shutdown.  The process ain’t pretty, but what I think we are seeing is resilience, durability, and yes, the indomitable human spirit.  And portfolios diversified broadly across traditional and alternative asset classes are likely to perform better than overconcentration to recent high-fliers

2020 – Thriving Economy to Abrupt Shut Down
If we go back eons to the early days of 2020, we remember that the economy was booming.  The outlook seemed expansive, until we began to hear disturbing stories about a thing called COVID and a place called Wuhan.  At first this was a concern, then a problem, and eventually an all-out panic.  The market plunged as many of us could not believe that any governments, especially the ones in power in early 2020, would actually put a halt to most all economic activity worldwide.  This was unprecedented.  And the market did not like it. 

The improbable and immense global shutdown was then matched with equally improbable and immense fiscal and monetary stimulus.  The market rallied big time, as everything of investable value breathed a sigh of relief.  But for the vulnerable, the story was not nearly as sanguine.  It was an odd and disturbing time, a time of great unevenness.  But what could we realistically have expected?  This experiment of global shutdown/reopening never before had even been considered.  And once begun, there was no turning back as we began to face an aftermath of unintended consequences, both positive and negative.

2021 – Diversification was a Bad Thing?
The winter of 2021 was long.  The pandemic wore on and we revealed ourselves as a nation of conspiracists, delusionals, worriers, and optimists.  For global investors, the approval of vaccines offered a pathway toward normalcy, disrupted by innovative variants and sanctimonious holdouts.  Recovery, both organic and due to stimulus, gathered momentum and stock indexes rose.  But the unevenness of the pandemic impact on stocks continued as indicated by the narrowness of stock market gains. 

Traditional metrics of the economy sent mixed signals, so it has become harder to read what is going on.  For example, unemployment is low, with many job openings, but resignations are high due to retirement and restructuring.  The surge in residential housing prices is likely not a bubble akin to the 2007 situation.  The shortage of chips meant that for a brief time, used cars were actually a good investment.  And in stocks, the S&P 500 index rose, but many underlying elements fell or underperformed. 

How can the S&P 500 index do well, while many components falter?  To understand this, you need to know that the S&P 500 is what is called a “float-weighted” index.  That means that the companies with the most shares in circulation have the largest impact on the index.  This generally correlates to the biggest companies, often tech companies.   As they continued to grow, they pumped up the overall index.  This is fine if you only own the index, or only those top names.  But if you own other things – a diversified portfolio – you would underperform.  Concentration can help, or it can hurt depending upon what you own. 

In other words, the seeming strong performance of the overall index belied the deeper health of the market.  Performance of many underlying components to the major indexes fell, especially in the last six months of the year.  As such, diversification worked to undermine portfolio performance in 2021.  Q3 and Q4 of 2021 saw huge variation in returns:

• Large Cap stocks did well (especially large tech):  up 10.3%.
• During the same time, European stocks (EFA) and US Small Caps fell almost half a percent at 0.40%.
• Emerging markets (EEM) fell almost 10.5%.
• The bubble burst on new economy fintech stocks with the Future Fintech fund FTFT down 55.68% and ARK Innovation etf down 26.8%, and the much-celebrated BITW etf fell almost 30% from its launch.

Looking Ahead
Of course no one can predict the future.  If you examine almost any time period throughout our nation’s history, you find multitudes of crises and tribulations.  You also find that we recover.  Some people insist that we’re playing on borrowed time and eventually this whole experiment will collapse or implode.  Others see us as resilient – imperfect and uneven, but ultimately durable.  By now I assume you know which viewpoint I perceive.

I assume we should expect more crises and tribulations.  Though I hope we never lose our outrage and idealism, maybe we can also begin to see these difficult times as inevitable and perhaps even as opportunities.  Major disruptions make it easier to identify the seams and weaknesses.  And these weaknesses may reveal to us the work that is yet to be done and the money we might stand to make.

In the year ahead, short-term volatility (often called a sell-off or correction) should surprise no one.  Over the long-term, many corporations are likely to continue to generate earnings and provide returns for shareholders, in spite or perhaps because of challenges presented by climate change, virus mutations, and income disparity. 

Over the medium-term, the next five years or so, stock returns might moderate to mid-single digits per year.  Investors can still find growth, but it may be more difficult than chasing the latest stock chatter on Reddit or following a simple index.  Diversification, I expect may once again be the best way forward as lackluster allocations of recent years, such as international, emerging markets, and small caps, take turns as leaders.  Also, alternative investments such as REITs, private equity, private credit, and other strategies more traditionally used by pensions and endowments may become common approaches for individual investors.  Finally, individual stock picking may continue to play a role adding increased returns or “alpha” to a core allocation model.

Conclusion
Looking to history can provide helpful context because as they say, though it may not be parallel, it certainly rhymes.  Some of what we confront today is in fact new, such as the impact of technologies and other innovations.  Some is not so new but only feels that way, for example we’ve had multitudes of booms and busts throughout the centuries of human society.  And much is constant: we are human with all of our brilliance, ignorance, and foolishness.  Maybe this last is the most important context of all.  Do you consider us a species born into original sin, ultimately shameful and doomed?   Or are we here on this earth to thrive, to share, and to help one another?  It seems to me we have a choice.  My mother, an Episcopal priest, had a simple prayer that became foundational to my worldview and that of my siblings:  It is good to be alive, life is a gift.  In terms of context, this seems a fine place to start.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. 

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.  Asset allocation does not ensure a profit or protect against a loss.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not protect against market risk.

The data included is developed from sources believed to be providing accurate information.