Fourth Quarter Commentary 2021
Another year is in the books. If you are like most people, February of 2020 seems like it was just days ago in many ways. On the other hand, I can’t truly remember a time before we weren’t worried about going out in public or if a stuffy nose or sore throat was just a cold or something far more serious.
In 2021, the investment markets treated us very well. For the year, the S&P 500 rose 27%. Other categories, such as real estate and small companies did comparably well or better.
Overall, there are several topics I want to cover. There is no particular order, really. But I’d like to share some thoughts on each one individually.
Inflation that began rearing its head during the shortages of 2020 has remained despite government predictions to the contrary. We continue to have too many dollars chasing too few goods. That forces prices up.
There is also no doubt that much of the inflationary pressure is the direct result of multiple rounds of government stimulus. The good news is that the Federal Reserve is finally acknowledging this and is committed to raising interest rates in 2022 to fight inflation.
This will benefit us as investors because the fixed-income portfolios which have earned so little in the last 2 years will finally bear some fruit. But this will be a slow process as the Fed moves glacially when it comes to normalizing rates.
I’m sure you noticed gas prices rising significantly in 2021. Price increases of a dollar or more have been common. Much of this is related to supply chain issues. US production has not ramped up to meet local demand.
As I mentioned in a recent weekly email, it seems that the “spread” between wholesale and pump prices for gasoline has increased significantly - from about 60-70c a gallon to over a dollar a gallon.
My hope is that this is a temporary glitch in pricing. But it could be a longer-term phenomenon. To me, it definitely feels like someone between the oil fields and the gas station is making an extra 30 cents a gallon.
Job growth has been robust in 2021. This should continue in 2022. On Friday (January 7th), we will have the latest Jobs Report from the government.
As you recall, the previous month’s Jobs Report was fairly weak. This is a shock as fewer and fewer people are applying for unemployment and companies are screaming for workers.
I suspect there is another force at work. The numbers the Labor Department reports are often adjusted for seasonal factors. Hiring increases in May and June as students graduate. It decreases in August as students enroll in school.
In addition, hiring increases in November as stores staff-up for the Holiday Season. Do you see where this is headed?
There was no staff-up in 2021. The number of people hired in the month was the same as if it was October or July. Given there were so many jobs available, potential employees had the pick of the litter.
My pet theory is that the Labor Department’s algorithm’s worked against it. We didn’t have a weak month of employment. We had a computer which made an adjustment that didn’t fit the current situation.
What does this mean? I suspect that the December and January employment numbers will turn out more positive than expected. There are still millions of jobs unfilled in the nation. And millions who are trying to be matched up to those jobs. Employment should continue to improve.
Have you tried to buy a house in the last year? I think the word best to describe the real estate market since about Summer of 2020 would be: Insane!
Home prices continued to rise in 2021 as buyers continued to chase houses and over-bid in hopes of getting any home.
Friends of ours put offers on 17 different houses before one was finally accepted. It was a year-long process.
The good (or bad) news is: it appears the real estate boom may be over. Prices are stabilizing. In addition, as the Federal Reserve increases interest rates in 2022, mortgage rates will follow. This will put deflationary pressure on home prices, possibly dropping them to pre-pandemic levels in a few years.
Economically, we are in an excellent position as I write this in late December. Despite inflationary pressures, people have excess savings and income. As more people are hired, there is more money flowing in the economy, which fuels more purchases which causes. . . more people to be hired.
For 2022, I suspect we will see much more of the same. Increased employment, despite inflationary pressures, will grow the economy and increase corporate profits and lead to even more job growth.
Sadly, that ride has to end someday. And it’s likely sooner than later.
On the other hand, I’ve been saying that for a decade now.
It’s true. Do you remember our last recession? It ended in March of 2009.
That economic blip we had in the Spring of 2020 - that wasn’t a recession. The economy didn’t drop far enough for long enough to constitute a recession.
Just because it’s been almost 13 years since our last recession does not mean we are going to have another soon. Time isn’t a factor. And I could expound for a whole day about why we’ve been in this growth cycle for so long.
What I know is that - as labor markets truly become tighter, inflationary pressures will actually increase. In addition, producer costs - from all the added labor - will rise as well. This is the beginning of the end of this economic cycle.
But that isn’t a reason to go screaming for the exits. We need an economic time-out in order for the economy to continue moving forward. We need time to balance all of the changes a growing economy creates. And once we adjust, the economy, and the markets along with it, will begin to grow again.
Times of contraction in the economy are as necessary as times of rest for the land of a farmer. I hate going through them as much as you do. But I’m sure if you looked at your investment statements, you’ve gained considerably in your portfolio since 2009. That’s what temporary contraction does: It leaves room for future growth.
I do not believe that 2022 is the end of the cycle. But the signs of a tight labor market are beginning to show.
For now, our goal is to continue our current strategy. Should investment opportunities arise, we will take advantage of them.
Justyn, Anna and I want to thank you for having the privilege of helping you with your finances. It is truly a blessing to our family.
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That’s all. Happy New Year! Stay safe!
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