Reflections on 2021

We’ve been seeing a lot of cartoons and jokes lately about how it has felt like Groundhog Day, with 2021 being basically a repeat of 2020. The reference, of course, is to the COVID pandemic, which raged through 2020 and then, when we all expected a return to normalcy, COVID once again peaked (twice) during 2021 with the Delta and Omicron variants. But the Groundhog Day analogy could just as easily be applied to the investment markets.

As in prior years we will first remind you of SWFG’s general principles:

• We are long-term, goal-focused, plan-driven equity investors. We believe that the key to lifetime success in equity investing is to act continuously on a specific, written plan. Likewise, we believe substandard returns and even investment failure proceeds inevitably from reacting to (let alone trying to anticipate) current economic/market events.
• We're convinced that the economy cannot be consistently forecast, nor the markets consistently timed. Therefore, we believe that the only reliable way to capture the full long-term return of equities is to ride out their frequent but historically temporary declines.
• Just in the last four decades:
• The average annual price decline during a year from a peak to a trough in the S&P 500 exceeded 14%.
• One year in five, the decline has averaged at least twice that. And on two occasions (in 2000-02 and 2007-09), the Index has actually halved.
• Yet the S&P 500 came into 1980 at 106, and went out of 2021 at 4,766.
• Over those 42 years, its average annual compound rate of total return (that is, with dividends reinvested) was more than 12%.
• These data underscore our conviction that the essential challenge to long-term successful equity investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines.

These principles will continue to govern the essentially behavioral nature of our advice to you in the coming year…and beyond. Expect to hear this routinely from us.

Our current observations:

• The world elected to respond to the onset of the pandemic essentially by shutting down the global economy—placing it, if you will, in a kind of medically induced coma. In this country, we experienced the fastest economic recession ever, and a one-third decline in the S&P 500 in just 33 days during Q1 2020.
• Congress and the Federal Reserve responded all but immediately with a wave of fiscal and monetary stimulus which was and remains without historical precedent. This point cannot be overstressed: we are in the midst of a fiscal and particularly a monetary experiment which has no direct antecedents. This renders all economic forecasting—and all investment policy based on such forecasts—hugely speculative. We infer from this that if there were ever a time to just put our heads down and work our investment and financial plan—ignoring the noise—this is surely it.
• The 2021 results for respective indices:
• The S&P 500 was up 27% and echoes the stock market of the late 1990s:
• The largest 5 stocks in the S&P 500 now make up 22% of the Index
• The largest 10 stocks in the S&P 500 now make up 28% of the Index.

• Russell Midcap Index + 22.58%.
• Russell 2000 Small-Cap Index + 14.82%.
  • Small cap companies retreated considerably in the second half of 2021.
• The technology-heavy Nasdaq Composite Index + 21.39%.
• The foreign markets were not quite so generous to investors:
  • EAFE index of companies in developed foreign economies +8.26% in dollar terms.
  • Emerging market stocks of less developed countries - 4.59% in dollar terms.
• Other investment categories produced some phenomenal gains:
  • Real estate (Wilshire U.S. REIT index) + 46.18%.
  • The S&P GSCI index, which measures commodities returns + 40.35%.
• In the bond markets the going has been tough:
  • Yields on 10-year Treasury bonds rose modestly during the year, from 0.95% a year ago to 1.51% currently.
  • Five-year municipal bonds are providing, on average, a meager 0.60% yield.

• If 2020 was the year of the virus, 2021 was the year of the vaccines. Vaccination as well as acquired natural immunity are in the ascendancy, regardless of how many more Greek-letter variants are discovered and trumpeted to the skies as the new apocalypse. This fact, it seems to us, is the key to a coherent view of 2022.
• In general, we think it most likely that in the coming year:
• The lethality of the virus continues to wane.
• The world economy continues to reopen.
• Corporate earnings continue to advance.
• The Federal Reserve begins draining excess liquidity from the banking system, with some resultant increase in interest rates.
• Inflation subsides somewhat.
• Barring some other exogenous variable—which we can never really do—equity values continue to advance, though at less (and probably a lot less) than the blazing pace at which they've been soaring since the market trough of March 2020.

Please don't mistake this for a forecast. All we said, and now say again, is that these outcomes seem to us more likely than not. We are fully prepared to be wrong on any or all of the above points; if and when we are, our recommendations to you will be unaffected, since our investment policy is driven entirely by the plan we've made, and not at all by current events.

With that out of the way, allow us to offer a more personal observation. These have undoubtedly been the two most shocking and terrifying years for investors since the Global Financial Crisis of 2008-09—first the outbreak of the pandemic, next the bitterly partisan election, then the pandemic's second major wave, and most recently a 40-year inflation spike. You might not be human if you haven't experienced serious volatility fatigue at some point. We know we have.

But like that earlier episode, what came to matter most was not what the economy or the markets did, but what the investor himself/herself did. If the investor fled the equity market during either crisis—or, heaven forbid, both—his/her investment results seem unlikely ever to have recovered. If on the other hand he/she kept acting on a long-term plan rather than reacting to current events, positive outcomes followed. As it has been in the past and we expect it will be in the future.

As always, we welcome your comments, questions and concerns. We can't predict, but we can plan. If you or anyone you know should need a second opinion on their financial situation, introduce them to www/striblingwhalen.com or call us at 678-989-0048.

Disclosure:
Any opinions are those of Stribling~Whalen Financial Group and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The stock indexes mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

Sources:
Russell index data:
http://www.ftse.com/products/indices/russell-us 

S&P index data:
https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
https://www.marketwatch.com/investing/index/spx

Nasdaq index data:
http://quotes.morningstar.com/indexquote/quote.html?t=COMP
http://www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

International indices:
https://www.msci.com/end-of-day-data-search

Commodities index data:
https://www.spglobal.com/spdji/en/index-family/commodities/broad/#overview

Treasury market rates:
http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Bond rates:
http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/
https://seekingalpha.com/article/4396955-s-and-p-500-concentration-risk-define-2021
http://clipart-library.com/clipart/kc8ozRG9i.htm