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Investment Letter

4th Quarter 2021

The financial markets continued to thrive during a period of formidable headwinds in 2021. While cash and bond returns were nominal, investors enjoyed robust equity returns. Of the major asset classes we track, Real Estate (REITs) was the big winner in 2021 with a 45.91% total return. The sizable performance for this asset class was due to the disproportionate pandemic impact on REIT and Real Estate activities. Once conditions and fundamentals improved, the strong rebound in performance occurred. The S&P 500 Index was another big winner with a total return of 28.71%. During 2021, the index set seventy (70) new all-time closing high records to finish at 4,766.18 points. The largest sector components of the index (information technology, consumer discretionary, health care, financials, and communication services) were all major contributors to the index’s double-digit performance. Over the last 13 years, a positive return occurred in the S&P 500 Index 12 times and 10 of those years resulted in double-digit positive returns. An awesome winning streak by any measure. Equity performance elsewhere was also impressive. Domestic small company stocks, technology stocks (NASDAQ), international stocks, oil and gas stocks, and commodity stocks all returned strong performance numbers. 2021 will go down in the record books as another profitable year for investors.   

As the two-year pandemic anniversary approaches, health care experts estimate a vast majority of the American population has some level of virus immunity either through inoculation or infection. Normal activities have resumed, people have adjusted their lifestyles, and the economy has fully recovered from the 2020 recession. 

During the 4th Quarter, economic data pointed to a continuation of broad improvement, but at a slower pace due to the impact and resurgence of COVID-19 cases. Real gross domestic product (GDP) increased at an annual rate of 2.3% (third quarter data) versus a 6.7% increase during the previous quarter. The deceleration in real GDP was attributed to the slowdown in consumer spending on goods and services. Other economic news included: low unemployment, manufacturing activity growth, higher corporate profits, improved consumer confidence, struggling conditions in the housing market, and higher oil/gas prices.

Recent inflationary data signaled an economic alarm for investors as the Consumer Price Index (all items) rose 7% for the 12 months ending December. Further details showed it was the eighth straight month of inflation over 5% (annual rate) and the largest 12-month increase since the period ending June 1982. 

The spike in inflation (early 2021) was believed to be transitionary and short-lived. Unfortunately, conditions have demonstrated staying power due to supply chain issues that have been compounded by a demand surge for goods instead of services, unusually low inventory, and lingering transportation bottlenecks. It is normal for strong demand and restrained supply to result in higher inflationary pressures, and we believe higher long-term inflation is a major economic red flag. However, we still think the current situation appears more temporary than permanent, and we anticipate inflation pressures will diminish over the coming months.  

The Federal Reserve confirmed the economic data in the recent Beige Book and the December 2021 Federal Open Market Committee (FOMC) meeting minutes. The Committee stated that vaccination progress and strong policy support have strengthened economic activity and employment. They also stated that financial conditions remained accommodative reflecting policy measures, but pandemic related supply and demand imbalances were contributing to elevated levels of inflation. Based on the information, the Committee once again decided to maintain the target range for the federal funds rate at zero to ¼ percent. The Committee also announced their intention to further reduce the asset purchase program and stated they would accelerate the reduction starting in January, implying that increases to the Fed’s security holdings would cease by March 2022. As always, the Fed reaffirmed their commitment to monitor a wide range of information (health, labor market, inflation, financial and international developments) and adjust the stance of monetary policy if threats emerge.

Our 2022 outlook for the domestic economy is optimistic. We believe the prospects for sustainable growth are solid due to healthy household balance sheets, strong consumer demand, the need for businesses to rebuild inventory, and accommodative financial conditions. The global supply chain issues are likely to persist well into 2022, but we do believe imbalances will move toward equilibrium. We believe the FOMC is prepared to increase interest rates in 2022 to keep inflation at a moderate level without causing a significant decline in economic growth (recession). The timing of a rate increase is still a work in progress, but we expect to see an increase by June 2022 as the Fed continues their normalization path. We are expecting a more volatile environment for the 2022 financial markets. Investors have been spoiled with superior returns in recent years and 2022 may be a challenge considering the variables (less things for the economy to recover from, higher inflation and prices, slower growth, less fiscal policy support). 

The past has shown how fragile the global economy can be, and we feel there are numerous areas of concern for investors that include the following: prolonged supply chain disruptions, labor market imbalances, unexpected Central Bank actions, fiscal policy uncertainties, sustained inflation, energy and commodity price shocks, political disfunction, extreme weather events, natural disasters, cyberattacks, terrorism, and escalating geopolitical tensions.    We are always hopeful the global economy and financial markets remain resilient despite the turbulence and uncertainty, but we are keeping a watchful eye on these and other threats as they develop.

Building a solid investment strategy is important for the success of any investor, and an integral part of that strategy includes the use of a properly diversified investment portfolio. The basics of diversification are simple for investors. Create a portfolio with multiple investments to reduce overall risk. As simple as that concept sounds, the process is often more complicated because true diversification needs investments that do not historically move in the same direction each year (cash, bonds, stocks). See the table below for the annual returns for a diversified portfolio and various asset classes.

Asset Class Annual Returns [1] 

2000 through 2021 

Date

Three-Month U.S. T-Bill Index

U.S. Intermediate Treasury Bond Index

S&P 500 Index

Russell 2000 Index

MSCI EAFE Index (net div.)

Dow Jones US Select REIT Index

Diversified Portfolio

 
 
 

2021

0.05%

-1.72%

28.71%

14.82%

11.26%

45.91%

14.63%

 

2020

0.67%

5.77%

18.40%

19.96%

7.82%

-11.20%

10.84%

 

2019

2.28%

5.22%

31.49%

25.52%

22.01%

23.10%

18.06%

 

2018

1.87%

1.41%

-4.38%

-11.01%

-13.79%

-4.22%

-3.26%

 

2017

0.86%

1.14%

21.83%

14.65%

25.03%

3.76%

11.00%

 

2016

0.33%

1.06%

11.96%

21.31%

1.00%

6.68%

6.79%

 

2015

0.05%

1.18%

1.38%

-4.41%

-0.81%

4.48%

0.95%

 

2014

0.04%

2.57%

13.69%

4.89%

-4.90%

32.00%

7.89%

 

2013

0.07%

-1.34%

32.39%

38.82%

22.78%

1.22%

14.81%

 

2012

0.11%

1.71%

16.00%

16.35%

17.32%

17.12%

10.45%

 

2011

0.10%

6.57%

2.11%

-4.18%

-12.14%

9.37%

2.53%

 

2010

0.13%

5.29%

15.06%

26.86%

7.75%

28.07%

12.74%

 

2009

0.21%

-1.41%

26.46%

27.17%

31.78%

28.46%

17.42%

 

2008

2.06%

11.35%

-37.00%

-33.79%

-43.38%

-39.20%

-20.52%

 

2007

5.00%

8.83%

5.49%

-1.56%

11.17%

-17.56%

3.95%

 

2006

4.85%

3.51%

15.80%

18.37%

26.34%

35.97%

14.17%

 

2005

3.07%

1.56%

4.91%

4.55%

13.54%

13.82%

5.52%

 

2004

1.33%

2.02%

10.88%

18.32%

20.25%

33.16%

11.09%

 

2003

1.16%

2.10%

28.69%

47.25%

38.59%

36.18%

21.05%

 

2002

1.80%

9.29%

-22.10%

-20.48%

-15.94%

3.58%

-6.99%

 

2001

4.44%

8.16%

-11.89%

2.49%

-21.44%

12.35%

-0.93%

 

2000

6.19%

10.25%

-9.10%

-3.03%

-14.17%

31.04%

1.89%

 

 


[1]Data provided by Dimensional Fund Advisors.  Diversified portfolio composition: Cash 10%, U.S. Bonds 30%, U.S. Large Co. Stocks 30%, U.S. Small Co. Stocks 10%, International Stocks 10%, and Real Estate Securities 10%.  Rebalanced quarterly.

The data in the table illustrates the annual volatility between asset classes. It also shows how a diversified portfolio that uses a combination of the same asset classes can mitigate investment volatility. 

Two points are important for investors to consider about annual returns in any given year.

  1. A diversified portfolio is unlikely to ever lead the group in performance.
  2. A diversified portfolio is unlikely to ever be the worst performer. 

Simply put, a diversified asset allocation strategy is a great method to manage portfolio risk while endeavoring to maximize portfolio returns. 

While diversification plays a significant role in any investment strategy, investing is also an ongoing process that requires regular attention and maintenance for a successful outcome. 

These steps are critical for investors.  

  1. Monitor – Investments should be evaluated for changes in strategy, performance, and risk. Some investments are not designed to be an all-weather performer.
  2. Rebalance – The asset allocation of an investment portfolio should be reviewed and adjusted as needed to match the appropriate risk level. Deposits, withdrawals, and account growth can cause a portfolio’s asset allocation to become unbalanced.
  3. Revisit – Review the plan to make sure it is still appropriate based on goals and objectives. If the plan no longer makes sense, a new strategy should be adapted. 

As I have often stated, our investment philosophy remains based on the fundamentals. We believe it is time---not timing---that matters most. Progressing toward long-term financial goals is more important than short-term performance, so stay focused and be calm when the markets are not.

Please consider making a New Year’s resolution to revisit and update your financial plan. The start of a new year is also a good time to review your estate planning documents for any personal circumstance changes.

Common events that could necessitate estate plan alterations:

  • Birth or adoption of a child or grandchild
  • Death of a spouse or family member
  • Marriage, divorce, or re-marriage
  • Illness or disability
  • Child or grandchild reaching the age of majority
  • Education funding
  • Death of a guardian, executor, trustee
  • Retirement
  • Sale of a home or business interest
  • Large gift or inheritance
  • Revisions in federal or state income tax or estate tax laws

As our firm enters its 39th year of providing advisory services, we want to wish you and your family a happy, healthy, and prosperous New Year. If you would like to schedule an appointment, wish to receive William Howard & Co.’s SEC Registration Form ADV Part 2A and Part 2B Narrative Brochure, or if you have any questions, please contact our office. 

In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust. 

With kindest personal regards, I am

Very truly yours,

WILLIAM HOWARD & CO. FINANCIAL ADVISORS, INC.

 

2021 Total Return Index Performance

Asset Class

Index

4thQtr.

YTD

Cash

BofA/ML Three-Month U.S. Treasury

0.01%

0.05%

U.S. Bonds

Barclays Intermediate-Term Treasury

-0.57%

-1.72%

U.S. Large Co. Stocks

S&P 500

11.03%

28.71%

U.S. Small Co. Stocks

Russell 2000

2.14%

14.82%

International Stocks

MSCI EAFE (net div.)

2.69%

11.26%

Real Estate

DJ Select Real Estate Total Return

17.22%

45.91%

Source: Morningstar

 

 

    U.S. Economic Data

 

GDP

2.3% Growth (annual rate) – 3rdQuarter 2021

 
 

Inflation

5.5% CPI (less food and energy) and 7.0% CPI (all items) over last 12-months ending December.

 
 

Interest rates

Federal Funds Rate range = 0.00 – 0.25%. Fed will maintain until labor markets reach Committee’s maximum employment level.

 
 

Jobs

December 2021 data - Unemployment at 3.9%; 199,000 non-farm payroll jobs added; Labor force participation rate 61.9%; Notable gains occurred in leisure and hospitality, professional and business services, manufacturing, construction, and transportation.

 
 

Manufacturing

Manufacturing activity grew in December (19thconsecutive month of growth); December ISM Manufacturing Index registered at 58.7%, a decrease of 2.4% from the November reading; Sentiment strongly optimistic but the manufacturing sector remains in a demand-driven, supply chain-constrained environment; shortages of material, higher prices, and transportation difficulties still impacting conditions.

 
 

Business Spending

Private non-residential investment increasing and remains higher than pre-COVID levels; New durable goods orders increased 1.6% in November (up 18 of last 19 months).

 
 

Corporate Profits

3rdQuarter 2021 - U.S. corporate profits increased by 3.4%. S&P 500 Earnings per share = $52.02 (up 37% year-over-year).

 
 

Housing

November 2021 year-over year data - New home sales down 14%; Existing home sales decreased 13.3%; Median sales price of existing homes rose 13.9% ($353,900); Housing starts up 8.3%; Building permits increased 0.9%; Housing inventory decreased 13.3% from last year; Unsold current inventory = 2.1-month supply; MBA fixed 30-yr mortgage rates = 3.31% ending 12/29/2021.

 
 

Consumer Spending

Disposable income remained subdued; Consumer Confidence Index improved in December (2022 growth expectations are positive); Retail and food services sales increased year over year; Total vehicle sales improved slightly but inventory remained low; Personal durable and nondurable spending improved; Personal savings rate continued to fall indicating higher spending habits.

 
 

Energy

Oil price (West Texas Intermediate) = $75.33/bbl – 12/31/2021; Gas price (U.S. average regular unleaded) = $3.275/gal – 12/27/2021

 

 

 

 

 

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