Summary:
* US and developed international equities rallied
* The importance of remaining rational in an increasingly emotional environment
Commentary:
A Blended Growth Benchmark returned approximately 2.80% while a Blended Balanced Benchmark gained about 1.96% in December.[i] These benchmarks represent the theoretical performance of diversified passive portfolios blending indices related to geography and asset classes. During December, international stocks in developed markets were higher with the MSCI EAFE net index up +5.05%[ii], slightly besting the S&P 500 index (up +4.48%[iii]), while the MSCI Emerging Markets equities lagged, only gaining +1.62%.[iv] From an asset class perspective, Fixed Income was down slightly as with the Bloomberg US Agg Bond Index falling -0.26%.[v] Crude Oil recovered a little more than half of November’s losses, gaining +13.6% to close at 75.21 a barrel.[vi]
A recent Wall Street Journal article cited an American Psychological Association survey conducted last year that found that after two years of pandemic, nearly one-third of adults are struggling with basic decisions, including small choices like what to eat or wear.[vii] One of the experts interviewed suggested that one way to make decisions was to replace individual choices with all-encompassing principles that do the work for you. If you create and honor rules, for example, you can better assess risks, mitigate biases and act. The year ahead, as with any new year, will bring both challenges and opportunities. How we meet these challenges will impact, in our opinion, our ability to capitalize on the opportunities and manage the challenges we are presented in the market. Here is what we suggest.
Avoid looking in the rear-view mirror. While the newspaper may state that the S&P 500 has returned 8.4% each year since its inception in 1957 to December 31, 2020[viii], no one should put 100% of their retirement savings into the S&P 500. If one did, those savings could be exposed to potentially swift, unexpected losses. We explored this exposure in Risk Happens Fast. So, why would we consider the S&P 500 a benchmark for what your real-world, diversified portfolios have done? We should not.
Search for the best potential investments going forward, not what worked in the past. CNBC’s twice yearly “Millionaire Survey” discussed the inherent risk of buying and holding onto large technology stocks (FANGMAN) – “They [investors] haven’t got the guts to pull out.”[ix] For example, investors continue to ignore Apple’s missing earnings guidance in its recent quarter given the prospect of reaching a $3 trillion market capitalization. And the Apple car? Bulls have been trotting that one out since 2014. We’ve seen how a drawdown in technology stocks played out in 2000, and shared our thinking in What If the Bubble Bursts?
Pay more attention to what is going on beneath the surface. In December, Bloomberg ran a story when the S&P 500 closed at a 52-week high. It highlighted that 334 companies trading on the New York Stock Exchange hit a 52-week low, more than double the amount of those hitting 52-week highs on that same day[x]. The last time that the market experienced this Market Internal[xi] was just prior to the tech bubble collapse more than twenty years ago. We discussed other internals, as well – poor liquidity and retail trader’s share of stock market volume in Inflation and Fragility.
Consider that we are likely in uncharted territory. Over the last decade, the Federal Reserve has tried multiple times to end its various “money printing” programs, but it didn’t take long before a market downdraft caused a “U-turn.” This time, the difference is that the Fed is perceived to have lost control of inflation. On January 5, Federal Reserve meeting minutes[xii] indicated officials are considering an earlier timetable for shrinking their $9 trillion balance sheet – that’s not just raising rates or tapering buying (“printing”), that’s completely taking away the liquidity punchbowl. In our opinion, the most prudent prescription is The Return of Active Portfolio Management.
The Wall Street Journal article mentioned above concludes with advice from Annie Duke, a former professional poker player and author of How to Decide. She reminds us that many decisions can be tweaked later but we must ask, “What might be the early warning signs of an unpleasant outcome?” Active risk balanced investing can help identify potential problems, guide us through a volatile market landscape and help us in managing the outcomes.
In December, we presented our unique perspective on the current investment and economic environment via a small group gathering of select clients and prospects. To listen to the recording of our presentation, please reach out to your Wealth Manager or Brian Lasher <blasher@cigcapitaladvisors.com>.
You can find more information on this and related topics at https://cigcapitaladvisors.com/category/asset-management/.
As we enter 2022, we remain focused as always on ensuring that client portfolios are aligned with their planning objectives and long-term goals.