2021 marked the 3rd best year for the US stock market¹ in the last 20 years. Meanwhile it marked the 2nd worst year for bonds². However, the mood of the stock market quickly changed once the calendar rolled into 2022, dropping 10%...or the level the media likes to officially term a “correction”, it has since recovered slightly and is down about 6% for the year.

Investors appear to be grappling with the implications of coming Federal Reserve actions in light of inflation rates we haven’t seen in nearly 40 years³.

“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” - Sam Ewing

I think the above quote describes inflation quite well. It makes even more sense once you realize all those dollar figures clearly need to be increased based on the era it is being repeated in.

For perspective, over the last 30 years average prices (as measured by the consumer price index) have approximately doubled. Obviously prices have increased much more in some areas like medical care and college education, and less for other areas like clothing. That doubling of prices really drives home the effects of compound inflation, especially since average annual inflation over that time was only a little over 2%.

Everyone had become used to inflation eating away at their purchasing power slowly and quietly, it seemed to happen in that background. However, last year it was hard to ignore as inflation came in above 7%...a level not seen since 1982.

Unlike previous years, it is actually surprising to come across anything that hasn’t gone up in price, often significantly. You see it at your local grocery store or restaurant, you see it in appliances and cars, you see it with building materials and contractors. Even popular subscription services like Amazon Prime and Netflix have decided now is a good time to pass on price increases, likely because they realize everyone is getting desensitized to them.

The Federal Reserve Changes Their Tone

While the Federal Reserve had been downplaying inflation concerns throughout 2021, the reality of the widespread nature of the high inflation numbers made them change their tone by the end of the year.

It is expected the Federal Reserve will begin increasing short-term interest rates in March. While the actions by the Fed regarding short-term interest rates are not directly tied to long-term mortgage rates, they are still indirectly influenced by them. As a result we have seen rates for the average 30-year mortgage increase by about 0.5% over the last 2 months. While mortgage rates are still historically low, they are now the highest they have been since before COVID.

While increasing interest rates have a short-term negative impact on bond prices, bond investors with a longer time horizon should actually want higher rates. Higher rates mean that bond investors can reinvest their interest and proceeds from maturing bonds into the new higher rates…over time this should result in higher returns than if rates stay low. However, one of the first positives investors will see from the Federal Reserve increasing interest rates will likely be slight increases in interest paid on their savings accounts.

COVID-19 - Divergent Responses

While every country claims to be “following the science”, what that actually means as it relates to government responses is more divergent than ever. China continues following a seemingly mythical zero-covid policy, meanwhile Nordic countries have committed to ending nearly all previous restrictions. While you might assume that different policies around the world are driven by their hospitalization or death rates, in reality there is no real correlation.

For instance, Israel, which was the first country to rollout booster shots⁴, recently announced the elimination of its “green pass” requirements which mandated either proof of vaccination or a negative test to enter restaurants, movie theaters, gyms, and hotels⁵. This is despite the fact that Israel is currently experiencing their highest COVID-19 hospitalization and death rates since the start of the pandemic.

Meanwhile every state and county in the United States continues to take their own approaches. You have places like Boston which just now started vaccination requirements and yet you simultaneously have places like Virginia reversing most of their mandates.

While all these different approaches might be fascinating to those involved in public policy research in the future, the constant change is nothing but disruptive to businesses.

While most people agree that we will likely be living with Covid-19 (in all its various forms) for quite some time....everybody appears to have different versions of what that means.

Certain Uncertainty

The only certainties in life are death and uncertainty. Life becomes easier when you learn to accept both…or so I’ve been told. Sometimes when I write these letters I wonder if I’m creating more clarity or questions by discussing issues which can have no firm conclusions. After all, who likes uncertainty?

However, when it comes down to it, investing is all about managing uncertainty….and the key to managing uncertainty is first accepting that it is never going away. So maybe it is my hope that by discussing relevant issues of the day here, you can be assured that someone else is thinking about it, so you don’t have to.

Rest assured, you have a whole team here to help you navigate life's financial uncertainties. In addition, within each of your portfolios we have integrated thoroughly vetted and specialized management teams to help navigate the ever-changing markets on a day-to-day basis.

As always, we are here to serve you. Don't hesitate to reach out by phone or e-mail should you have any questions.

Prepared By:
Adam Jordan, CIMA®, AAMS®
Director of Investments/ CCO
Registered Principal*

1 – S&P 500 index   2 – Bloomberg US Agg Bond Index 
3 - https://fred.stlouisfed.org/series/CPIAUCSL#0
4 - https://www.timesofisrael.com/israelis-over-60-flock-to-receive-covid-vaccine-booster-dose/
5 - https://www.timesofisrael.com/covid-cabinet-votes-to-narrow-usage-of-green-pass-system/

Opinions expressed are not intended as investment advice or to predict future performance.  All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.  All economic and performance information is historical and not indicative of future results.   No investment strategy can ensure profits or protect against loss. Past performance does not guarantee future results.