As we close out 2021, it was most definitely a year filled with ebbs, flows and great amounts of uncertainty.  Looking back, it will be considered a very strong year for the stock markets while safer assets like bonds lagged.  Given above average returns in both 2020 and 2021, it has been an impressive string of performance given the many challenges faced by consumers, businesse, and investors in both years.

  While some would consider recent performance as “easy money conditions gone awry”, the markets haven’t been without risk.  Events have happened at a frenetic pace, including:

• A global pandemic that has had significant ramifications for how we live, how we work, and even understanding what “normal life” now means.  
• Cryptocurrency and meme stocks that were profitable for some left others with significant losses and volatility that makes the stock market seem tame.  
• Lastly, the rise and fall of “pandemic” stocks, or companies that benefited from stay at home restrictions, is a case study in how speculation can have very different outcomes depending on your investment time frame.  Companies such as Peloton (PTON), Teladoc (TDOC), and Citrix (CTXS) all faced meteoric rises as well as significant collapses in value over the past 20 months.  

Regardless of the time frame, and in good times or bad, market uncertainty will always be a part of investing.  There is always something on the horizon that could have a significant impact, good or bad, on market prices in the future.  This has been true for decades, and a smart assumption is that this will be a part of investing in the decades to come.

However, as uncertainty is a part of past, present and future markets, investing with a plan has always been the antidote to this uncertainty.  No one knows for certain what the future holds, but building a plan that considers risk and is flexible to changing markets and adaptable to life circumstances is the best way we can combat against the unknown.  Understanding the difference between rampant speculation in the latest fad versus prudent long-term investing is critical to making money work for you to achieve your objectives.  

As we think about what the market is going to look like in 2022, we rely on the same fundamentals that have defined market performance over the last 100 years.  

• What is the state of the economy?
• What is the state of the companies within that economy?
• What is the valuation (or what we are currently paying) for those businesses?  

We believe the economy is still on relatively solid footing but is not without challenges.  Despite the many curveballs of the COVID pandemic, consumers are learning to live and adapt to ever-changing conditions and are financially healthy with jobs growing and wages rising.  This usually portends to a strong US economy as much of our economic growth is derived from consumer spending.  

The economic backdrop is positive for business revenue and earnings growth.  Companies have bounced back from a difficult 2020 to grow earnings substantially in 2021, which we believe will continue (albeit at a slower pace) in 2022.  Over the long term, markets tend to follow corporate earnings growth, and both are currently at all-time highs and earnings growth is expected to remain above 10% next year as well.

The final consideration, valuation, is at the high end of its historical range.  We are paying more for companies than we did in prior years. However, interest rates remain relatively low and sentiment is that economic growth will continue to be robust, supporting a higher level of valuation.  So, while markets are expensive and we wouldn’t expect significantly higher valuations from current levels, they are manageable if economic and company growth remains above average.  

Because of these conditions, we believe that interest rates are more likely to rise than fall.  This, combined with a very low starting point of income, keeps us cautious on bond returns.  Bonds will provide some income as well as ballast to the volatility of the stock market, but we would expect very low to potentially negative returns in the bond market again in 2022.

For the stock market, we believe that markets can still go higher based on the reasons described above.  Remember though, volatility should be expected and corrections of 5% or even 10% can happen once or many times in a given year.  Given the strong performance of the past few years, it is wise to be prudent, but not overly cautious.  We would expect a higher market, but likely not to the level of recent years.  

Now, our perceived good conditions don’t come without potential threats.  COVID, politics, inflation and the Federal Reserve can all play a role in market sentiment and could be a headwind to market performance if they deviate away from expectations.  Further, there are sure to be other instances of uncertainty that are unknown to us now that may play an even bigger role in how the market perceives future risk.  

However, all of these issues act as inputs into the long-term fundamental drivers of economic health, business growth and valuation. Understanding current events while keeping focused on the fundamentals is the cornerstone of how we manage your money.  Using this in conjunction with your tailored investment plan to provide a customized solution that meets your objectives within the bounds of your risk tolerance will, as always, be the main goalposts on what we would consider a successful partnership.  

November was a down month for stock markets as new worries on a COVID variant along with the actions of the Federal Reserve were front and center on investor’s minds.  Both bond and stock markets were significantly more volatile as concerns about future actions and repercussions of potential government actions caused investors to re-examine risks. 

The S&P 500 was down 0.69% for November, with the negative movements concentrated in the back half of the month.  On November 26, news of a new COVID variant, now titled Omicron, caused the worst daily market performance since October 2020.  Governments rushed to adjust flight restrictions and examine populations for evidence of the variant while scientists and drug providers began the process of assessing the impact.  The bond market also displayed characteristics of a “risk-off” trade as well – with US treasury rates falling (leading to rising US Treasury bond prices) and some selling of higher risk bond assets like investment grade and high yield corporate bonds. 

As of now, we know very little about the impact of Omicron on long term business fundamentals.  The digestion of news forthcoming will likely create a more volatile market than we’ve seen in recent months, but this added volatility may go in both directions.  If Omicron has a more severe impact on individuals and causes a re-establishment of restrictions, then the market is likely to experience a decline.  If Omicron is determined to be controllable, and does not alter the prior trajectory of re-opening, then the markets could experience a snapback rally that continues into 2022. 

In other news, comments made from Chairman Fed Jerome Powell on November 30 also suggested that elevated inflation may be with us longer than anticipated.  Noting continued supply constraints along with potential Omicron effects, Chair Powell laid out a stance that could include an accelerated pace of reduction in bond purchases by the Fed.  This commentary led investors to believe that rate hikes may be coming earlier, and at a faster pace, than suggested prior. 

While the concerns of Omicron and Fed action are relatively new, concerns about issues and the effect on market trends are as old as the markets themselves.  There is ALWAYS something to be concerned about.  When markets are rising, it feels like they can’t go up forever and are “due” for a decline.  When markets are falling, it feels like there is no bottom.

Our stance remains that, over the long term, markets follow business fundamentals.  This includes the health of the economy, the health of businesses within these economies, and the valuation (or what we pay) for these businesses.  It is our opinion that nothing we have seen thus far necessitates a change in our outlook.  Reducing the level of support by the Fed does not change how a company generates more business to increase revenues and earnings.  Omicron could have an effect, but it is too early to make the call that this variant will have a significant impact on the healthy US consumer to go out and spend money.

The important part is not to get caught up in the noise and instead focus on the investment plan.  The plan should include taking enough risk to meet your long-term investment objectives but is also prudent and has some level of protection from decline.  Allow yourself to be nimble to market changes and take advantage of opportunity, but not so aggressive that it shifts you dramatically away from your risk tolerance or risk ability.   

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

October was a positive month for the market, with some of the largest companies in the world driving positive performance back to all-time highs. The worries that came in September were swept away in October; even as economic data is starting to show some signs of softness.  It’s clear that the current market trend is upward.  Investors are not searching for as many reasons to sell but instead looking for opportunities to buy. 

Stock markets in the US were strong in October.  The S&P 500 was up 7.01% during the month and the Russell 2000 (small cap stocks) were up 4.25%.  International stocks weren’t quite as strong but were still up as developed market stocks were up 2.46% and emerging markets were up 0.99%. 

US large cap stocks were led by some of the largest companies in the world.  Microsoft (MSFT) is up over 50% in 2021 and the market capitalization of the company ended the month at a staggering $2.49 Trillion.  This market cap has now superseded the second largest company, Apple (AAPL), with a market cap of $2.48 Trillion.  The most recent entrant to the Trillion Dollar Market Cap club, Tesla, is now up over 57% this year after a rapid rise in October. 

Bond performance continues the stagnation seen since the massive outperformance during the COVID driven correction of 2020.  Interest rates are higher than the levels of last year, creating a headwind to performance for both treasury and investment grade bonds.  Despite the stagnation, flows into bond funds and ETFs remain steady as investors continue to use bonds for low levels of income but also to protect portfolios from potential future stock market declines. 

Despite the market trending positively, economic and fundamental business data hasn’t been as overwhelmingly positive.  GDP estimates, which reflect US economic growth, are still positive but have been trending down as supply chain issues have caused product delays and higher prices on goods and services.  Companies have also been reporting earnings in October, and while year over year growth remains strong, the levels of positivity have been watered down somewhat by supply chain constraints and the rising cost of labor. 

While these trends are worth monitoring, Gradient Investments still views the level of demand from a healthy US consumer as the predominant reason to remain positive.  Supply problems and higher prices may persist in the short term, but fixing these issues is usually an easier task compared to trying to stimulate demand from an uneasy consumer.  Supply chains will adjust to meet demand, and a healthy consumer with a desire to spend usually is a good recipe for US businesses.       

As the last 2 months have shown, fears residing in markets in one month can transition to high levels of exuberance in the next month.  It is important to not react to a roller coaster of news and information that can create an emotional short-term response that will derail long term efforts.  The best way to do this is by building a fully tailored, well designed investment plan that can protect assets but also participate in market upside and keeping the risk aligned with your personal objectives.