“The important thing is not to stop questioning. Curiosity has its own reason for existence.”
Well, this past year may have been a step up from 2020, but we’re not quite out of the soup yet. It’s more than reasonable that folks are feeling a little worn out by the constant juggling as COVID’s dips and surges seem to reset our expectations every few months. And still, we’re left marveling at the strength and resilience we’ve seen in our clients and friends throughout this extraordinary (extended) moment in history. Grateful to be in it with you.
Thankfully, 2021 brought a semblance of normal with work and school rhythms moving in the right direction (with the occasional setback, of course) and the economy humming with a sizable jump in growth compared to the previous year. After dramatic shutdowns in early 2020 prompted massive and unprecedented economic stimulus, the U.S. growth engine restarted with a bang, posting the largest quarterly GDP gain in U.S. history in the third quarter of 2020 and has continued apace. Consider a few updated numbers (compared to our mid-year update) for context:
- The U.S. unemployment rate is back down to 3.9% (vs. 5.9%) after peaking at 14.8% in April 2020
- The average price of a U.S. home is up 26% (vs. 15%) since April 2020 (Case-Shiller 20-city composite)
- The earnings of S&P 500 companies is expected to grow 48% (vs. 56%) in 2021, based on analyst consensus estimates at the end of the year (the fourth quarter has yet to be reported).
- As of December 31, the S&P 500 stock index 41% (vs. 27%) higher than the previous all-time high before the pandemic.
In fact, the impressive growth in demand for goods and services coupled with supply chain and labor market constraints had the not-so-pleasant effect of inflation soaring to levels not seen in decades as we moved into the second half of the year. We discussed this in greater detail in our last quarterly letter. Investment markets, as they often do, ran ahead of the economic growth and have generally been moving up and to the right since the sharp but brief COVID dip in March 2020, extending one of the greatest bull markets of all time. We are pleased to see our clients benefit from their disciplined commitment to long-term investment.
As we’ve shared in the past, perhaps the greatest single tailwind for the continued rise in asset prices is extremely friendly fiscal and monetary policy, which was more or less stable in the first year of the Biden administration. We’ve seen a few changes on the margins, but the feared big increases in corporate and personal taxes so far haven’t come to pass and we’re guessing there may be little appetite for boat-rocking on this front in a congressional election year. In addition, the low interest rate environment—resulting in current negative real yields on safe investments—remains a powerful driver of investment in riskier assets. We saw some lift in rates last year, and the Federal Reserve has signaled an increase in its policy rates is coming in 2022.
In our view, the eventual unwinding of the stimulus that has been generously applied through government budget deficits and easy money policies by the Federal Reserve and other global central banks is one of the thorniest issues we must contend with in the market. We’ve been preparing for higher rates for some time through strategic shifts in our investment strategy but don’t expect to completely avoid the temporary pain that may be triggered by any meaningful increase in rates. Again, we covered this in more detail in our October letter.
More simply put, we think it is reasonable to expect that we may see a period of more challenging broad market returns after the extraordinary returns we’ve seen in recent years. This gives us even more confidence and conviction in the targeted (yet diversified) investment approach we have for our clients. We believe it will become increasingly important to identify specific companies and areas within the overall market that will experience the growth necessary to achieve desired investment returns.
The dynamism of the market is fertile ground for the work of curious minds and our investment team is working hard to keep two questions front and center:
- How do we align client investments with the best opportunities for long-term value creation?
- How do we protect clients by avoiding long-term risks that will result in permanent capital losses?
We look forward to sharing our insights with you along the way and wanted to highlight a few specific examples as we turn the page to 2022. We’re convinced that the long-term trend of increasing data transmission, consumption, analysis, and storage is firmly intact and we’re investing in a number of companies poised to benefit. Healthcare is another industry ripe for growth and continued innovative disruption, while energy is another industry we believe is in the midst of a massive shift from carbon-based solutions (e.g. coal, oil, gas) to renewables, electrification, and batteries. What we’re seeing in the auto market transition to electric vehicles is just one part of a much broader picture that in our view will take many, many years to play out and will require significant investment in the decades to come. In each of these areas, there will be opportunities for building investment wealth, much like major long-term shifts of days past; the industrial revolution of the first half of the 20th century and the PC/Internet revolution of the last half a century being two such examples. Equally important, we must work to avoid long-term wealth destruction through poor company leadership, dying or obsolete industries, as well as from more subtle threats like inflation.
Our commitment to you is to keep asking “what’s next?” with insatiable curiosity, while minding our discipline around paying a fair price for entry. All with appropriate humility, which our decades of experience navigating the market has certainly taught us. As we often say in our investment meetings, “expect the unexpected!”
And so we look forward from this doorstep of 2022 with optimism and a curiosity that extends well beyond our investment strategy. Most importantly, we are curious about YOU, and our biggest hope at Tschetter Group for 2022 and beyond is your thriving. We’re looking forward to asking good questions and listening well, hoping we’ll learn a little more fully what’s important to you and where you want to go. After all, our main goal is to be an advocate for you and to help align your financial resources and plans in a way that will get you there. The desired result being increased optimism about life and money.
We can’t wait to see where you’ll go!
Cheers to 2022,