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December Commentary

What Happened:

  • US Equity Markets closed out 2021 with a bang, rallying in December into all-time highs.  Inflation and the FED’s outline of rate increases in the coming year did not seem to deter the markets as the year closed out.
  • The S&P 500 returned 26.9% for the year. The Dow Jones Industrial Average was 18.7% on the year. The NASDAQ index returned 21.4% in 2021. While these number on the surface look great for the broad U.S market it’s important to understand that stocks were quite fragmented on the year. Facebook, Apple, Amazon, Microsoft and Google returned collectively 37%.  It’s important to note that as those 5 companies now account for 23% of the S&P 500.  The flip side of those big tech names doing so well is small cap growth being negative on the year.  And if you dig a little deeper, Technology companies that are still in growth mode and not yet profitable, were down on average over 20%.  “Stay at home” companies were down on average over 3% for the year.  And lastly, if you thought that green energy was the death of Oil & Gas, you missed out on a 55% return from Crude Oil in 2021.
  • International Equity Markets were positive on the year, but did not come close to the that of the major US indexes. Global markets ex-U.S. finished up 8.41% in 2021.  Developed ex-U.S., which excludes the US and emerging markets, did slightly better up over 12.5% for the year.   Emerging Markets were negative, down over 2.5% on the year.  China made up over 32% of the country weighting in the MSCI Emerging Market. Note that China ADRs and Chinese Tech were down over 50% for the year.  The catalyst behind this drop was the reminder that the Party still call all the shots in China’s financial markets, combined with fears that US regulators would delist Chinese stocks in the US.
  • US Fixed Income performance was slightly better in Q4 with the increase of volatility in equity markets, however still ended the year down.  US Core bond indexes were down over 1.6%, and US Government bonds were down nearly 2.3%.  On the other hand, TIPS (inflation protected securities) were up almost 2.5% in Q4 and nearly 5.6% for the year. The only bright spot in fixed income was High Yield.  Little concern of defaults, a low interest rate environment and a ripping equity market,  made High Yield Bonds enjoy a return of 5.2%.   For those seeking shelter in sovereign debt outside the US in 2021, you did not find it. Global Government bonds ex-US down over 10.9%.   Showing the inverse relationship between the price and yields of bonds, the 10 year Treasury was down nearly 4% for 2021, pushing yields up to 1.52%, and increase of .59% from where they started the year.  Lastly, for those who desired refuge from potentially volatile equity markets AND the ultra-low interest bond markets – they found no solace in gold, as the commodity was down roughly 4% on the year.   As mentioned prior, the commodity of choice in 2021 was Crude Oil, up 55%.  

What we Did:

  • The performance gap between US Mega Cap tech (a.k.a. the “FAAMG” group) and much of the smaller, but still growing companies, continued to expand.  This has led us to make some changes in our Growth portfolio in order to manage risk, reducing exposure to less profitable growth which seemed likely to slide further.  We also used this as an opportunity to initiate small positions in a few stocks that we believe have significant long term growth potential – yet are now trading at a more reasonable price.  Fiverr International is an example of such a company. 
  • Our Growth oriented strategies underperformed major market indexes by a significant amount.  While this was disappointing, coming off a 2020 with very strong performance, a regression was expected.
  • Our Global allocation strategies held up well in November thanks to diversification and strategic broad market hedges.  In December, we saw some opportunity leading into year end to deploy some excess cash in a Dividend focused ETF providing use with a slightly greater value tilt. Our objective is to provide stable returns and hold up during some anticipated market volatility.
  • The ultra-low interest rate environment and flight towards defensive companies pushed our Dividend Income strategies way above their normal returns.  While an aspect of that scenario played out, a lot of value remained unrealized.  We stayed true to our strategy and discipline and kept a diversified portfolio of companies with solid cash flow which paid out dividends.  These quality and dividend paying strategies benefited throughout the year from holding quality dividend paying companies, in sectors such as energy and financials along with well-established real estate.
  • Once again, in the fixed income space, we prioritized shorter term durations to avoid collapsing face values when the Fed inevitably raises rates in face of such high inflation. 

What we are Watching:

  • Inflation continues to be significant focus heading into 2022.  US CPI levels rose to a level not seen since the 80’s, inflation likely won’t ease up much or the next several months.  We will be watching how much of an impact inflation will have on the everyday consumer and what that could mean for future spending.   Inflation has also expediated Fed action, such as the winding down its asset purchase program by as soon as March 2022.  Additionally, the Fed has also been prompted to announce the likelihood of 3 (or more) rate hikes in 2022, targeting June to start beginning the increase. We will be watching to see how these rate increase might impact both the bond and equity markets further, as this is partly already baked into prices. 
  • We also be keeping a close on the possible correction for Equity markets, as 2021 witnessed another monster year for the broad US indexes.  All time highs don’t necessarily mean the market has reached its maximum potential nor that it is overpriced. However we do believe there are facets of the market that overvalued and will likely correct, rotating into undervalued companies and sectors.  As previously mentioned, the growth of the broad market did not span all companies or assets classes.  If history is any basis, last year’s losers and more stagnant performers could offer real opportunity during 2022.
  • We will also continue to broadly watch on the global markets, feeling out the geopolitical landscape as well as the internal polices of many of emerging markets which continue to lean more towards socialism and leaning further away from capitalism.    The lack of stability in many of these nations has forced foreign investors to step back, domestic investors panicked and wreaked havoc on their local currencies.  We will be watching to see if this continued lack of stability continues to push investors towards developed markets such as the US, which might otherwise appear to be lacking relative value. 
  • We will also be keeping an eye on the COVID variant Omicron, which has also torn through the world, seemingly without regard for who is or isn’t vaccinated.  If this event had taken place early 2021, there might have been a real panic.  However, the general tone across the globe has been “we’re over it, let’s move on”. Despite less attention being spent on the pandemic, there are risks of huge economic losses with return of lockdowns and supply chain restrictions. 

Disclaimer: Investing in financial markets carries risk, including loss of principal. You can lose some or all of the money that is invested. Past performance is no guarantee of future results. The material contained herein is for informational purposes only. This document does not constitute a recommendation of securities, securities portfolio, transactions or investment strategies. The projections were created based on hypothetical information, there is no guarantee that any of them will come true. Proxy Financial is a registered investment adviser. Proxy and its Financial Advisors are not licensed in all states to offer securities and insurance products. This site is not a solicitation of interest in any of these products or service in any state which the registered representative is not properly licenses.