Newsletter
Dear Client,
It was a remarkable year in many respects. Several powerful forces, including higher monetary and fiscal stimulus and the distribution of vaccines helped propel U.S. equity markets to numerous all-time highs in 2021. U.S. stocks outperformed international stocks, while Emerging market stocks were relatively weaker due to China posting negative returns for the year. At home, inflation proved to be a significant issue, reaching levels not seen in three decades; driven in large part by a combination of low base effects, high energy prices, supply chain disruptions, and stimulus-fueled demand. As a result, markets witnessed the 10-Year U.S. Treasury yield rise from 1.01% to 1.74% in just 2 months.
Another fascinating component of 2021 was the rise of the retail trader. Markets were captivated in January as amateur investors waged war against hedge fund professionals by banding together to drive up the prices in companies like GameStop and AMC Entertainment among others. In addition to this speculative frenzy, you had a flurry of companies going public via special purpose acquisition companies or SPACs. This was only a small part of the story however as a powerful labor market, robust consumer spending, and a solid rebound in corporate earnings provided the backdrop for markets to surge higher.
The Fed took centerstage throughout the year by keeping interest rates near zero and continuing to pump billions of dollars into markets each month, forcing investors out the risk curve in search of higher-returning assets. In the first steps of normalizing policy, the Fed began tapering its asset purchases in November and expects the purchases will end by March of this year. It is expected that they will begin raising rates around this time and the market consensus is for three rate hikes in 2022.
As we look to the year ahead, we remain constructive on equities. While we don’t expect a repeat performance of 2021, there are enough positive dynamics in the economy that should remain supportive of stocks. On rates, we believe it’s likely that they end the year higher, but not materially so. As the Fed winds down it’s quantitative easing program in the first quarter, there should be an increase in the amount of Treasuries the private sector needs to absorb, which in turn should nudge yields higher. This move higher should be tempered however given that tightening cycles typically impose a flattening trend on the market, with the biggest yield moves in the front and belly of the curve. There are plenty of risks to be mindful of including but not limited to Fed policy error, Chinese invasion of Taiwan, Russian invasion of Ukraine, and potential future Covid variants. The year won’t be immune to turbulence, and we are open to the possibility of a correction in the first half of the year. As always, we remain nimble and would look to capitalize on any volatility the markets may present. We’d like to thank you for your continued support and wish you all a healthy and productive new year.
Regards,
Edge Wealth Management
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