Contributors: Andrew Walker, Bruce Ensrud, Matt Stockman


Thanks to abundant fiscal and monetary stimulus and a waning impact of COVID on markets, economic growth and market returns around the world generally exceeded expectations in 2021. Second to the wonderful market returns, inflation was the story of the year, with the combination of plentiful stimulus, economic activity, labor shortages, and a myriad of supply chain issues leading to the highest inflation print (7%) that the country has seen since 1982.

In the latter part of the year, these inflationary issues prompted a reluctant Federal Reserve (the “Fed”) to acknowledge that they would need to tighten monetary policy to slow inflation. The Fed will walk a fine line between tightening too slowly (and risk NOT reining in inflation) and tightening too quickly (and risk hurting the economy).

Where do we go from here? As the stimulus leaves the economy, the market should increasingly refocus on quality and fundamentals, rather than on speculation and growth.

Where We’ve Been – 2021 Q4 Review

Perhaps somewhat surprisingly, 2021 was a great year for markets. Thanks to the ongoing economic improvements coming out of the pandemic – both as it relates to economic activity and employment – and ongoing fiscal and monetary stimulus, U.S. markets (as measured by the S&P 500) were up 28.7% for the year. International markets were also generally positive, although less so, as the openness of those economies, vaccination efforts, policy response, and density of those regions varied – at times drastically – from that of the U.S..

Looking to the fourth quarter specifically, the year finished on a very positive note, with the S&P 500 finishing the quarter up just over 10%. This, even despite the severe reaction that markets initially had to the post-Thanksgiving discovery of the Omicron variant, the largest inflation increase that the United States has seen since 1982, and yet another signal by the Federal Reserve that they will increase their aggressiveness in withdrawing stimulus (this, to counter rising inflation).

Internationally, significant developments arose in China’s overleveraged property sector (and many other places in China – thanks to their communist regime), as well as in eastern Europe, with Russia seemingly set to invade Ukraine.

Market CategoryMarket IndexQ4 2021 
US Large CapS&P 50010.6%
US Small CapRussell 20002.1%
Int’l DevelopedMSCI EAFE2.7%
Emerging MarketsMSCI Emerging Markets-1.3%
US BondsBB US Aggregate0.0%
US DollarDXY*1.7%
Source: Blackdiamond | *Yahoo Finance

Where We’re Going – 2022 Q1 Outlook

Where do we go from here? Many are familiar with Warren Buffet’s famous quote: “Only when the tide goes out do you discover who’s been swimming naked.” As the tide (stimulus) goes out, and as interest rates go up (inflation), the market should increasingly refocus on quality and fundamentals, rather than on speculation and growth. Along with this waning stimulus, economic growth will continue to slow (we cannot recover forever), and inflation will pose challenges. The combination of all these things will result in higher market volatility which, in turn, will lead to greater opportunities for actively managed strategies.

Specifically, we believe that we are now seeing the beginning of a strong rotation into value and international stocks. Valuations in these areas are much more attractive than their growth and U.S. counterparts. In fact, from December 1 until January 18, developed international markets have outperformed the S&P 500 by almost 9%, and the S&P 500 Value outperformed the S&P 500 by over 6%.

Besides valuations, value stocks should be more resilient in the face of inflation, as companies in the space (think energy, industrials, healthcare, banks, etc.) are generally more able to pass along higher prices (and maintain profit margins) to consumers.

As always, we will be mindful of risks on the horizon. Heading into 2022, we have identified some of these to be:

Thank you for allowing us to partner with you as we navigate the ever-changing market. We appreciate your continued trust.

If you have questions or would like to dive deeper into this quarter’s outlook, please reach out to our investment team. We’d be happy to set up a virtual coffee to talk more.

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Index Benchmarks presented within this report may not reflect factors relevant for your portfolio or your unique risks, goals or investment objectives. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index.

The Bloomberg US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

The MSCI EAFE® Index is a broad market index of stocks located within countries in Europe, Australasia, and the Middle East.

The MSCI Emerging Markets® Index is a selection of stocks that is designed to track the financial performance of key companies in fast-growing nations.