Dear fellow investor,
We hope this letter finds you well, and that you find our comments and charts on the markets, economy, and portfolio positioning of value. We welcome your feedback and thank you for the trust and confidence you place in Brinker Capital Investments, a brand entity of Orion Advisor Solutions.
A Look Back
- The US leads the pack: US equities outpaced international equities during the fourth quarter and all of 2021, with the S&P 500 Index up 11% and 28% over the prior three and 12-months vs a return of 2% and 8%, respectively, for the MSCI All Country World Index ex-US. We think the factors that allowed domestic stocks to put up such superior relative and absolute performance during both periods were the same: strong fiscal and monetary support, a leading response to COVID-19, and robust economic and corporate profit growth. Conversely, China’s struggles weighed on emerging markets returns (more on that in a minute). For all our country’s challenges, we remain the world’s most important economy, the printer of the world’s reserve currency, and home to the world’s most powerful military.
- What ails China: If the US was at the front of the pack last quarter and last year, China was toward the back with the MSCI China Index off 6% in the fourth quarter and 22% in 2021. Broadly speaking, Chinese equities have been under pressure as investors navigated a meaningful regulatory crackdown on technology and for-profit education companies, concerns over a highly levered property sector, and ongoing tensions with the US over trade, Hong Kong, and Taiwan.
- The Fed pivots: The most important economic development of the fourth quarter, we think, was the “hawkish” pivot by the Federal Reserve as the world’s most powerful central bank threw in the towel on inflation being transitory, accelerated the schedule for tapering its securities purchase program, and telegraphed three increases for the all-important Fed Funds rate in 2022. With inflation near or at all-time highs, and the economy growing robustly, the Fed pivot is appropriate and was a catalyst for the volatility experienced in mid-December as investors contemplated what a new monetary policy construct might mean for the markets.
Something To Think About
- Build Back Better is dead; Or is it?: On the fiscal policy front, the big development in the quarter was Senator Joe Manchin not supporting the Build, Back, Better plan, as currently written. Many market observers cited that development – along with the Fed’s pivot and the Omicron variant – as a cause for market weakness in mid-December as some economists cut their 2022 US GDP growth estimates due to the legislation’s demise. With that said, we are not so sure BBB won’t be resuscitated in early 2022, as the Biden Administration and the Democrats look for a meaningful legislative win heading into the 2022 mid-term elections. Fiscal policy uncertainty is likely to persist into the new year.
- Still supportive: Investor conversations through 2022 will likely be dominated by COVID-19, the path forward for fiscal policy, and whether the Fed can tamp down inflation without upending the economy and market. While monetary policy will be less supportive of the economy and risk assets compared to 2021, it is and will be extremely supportive for some time to come. Consider that the real Fed Funds rate (the Fed Funds rate adjusted for inflation) sits at negative 6%. Even if the Fed raises rates several times in 2022, real rates – barring a collapse in economic growth or plunge in inflation – will remain deeply negative and a meaningful tailwind for economic growth and capital markets.
- COVID-19 cases surge: As we frame out this letter in late 2021, the Omicron variant of the coronavirus is driving a dramatic jump in the COVID-19 case count around the world. While not dismissing the ongoing suffering and hardship caused by the pandemic, early data suggests the highly transmissible Omicron variant causes milder symptoms in most, which should make it more manageable and less likely to cause broad lockdowns, which would be beneficial for global economic growth.
Present Positioning
- Early in the cycle: Given the above-average performance from the US stock market and economy in 2021, we think many investors are questioning the sustainability of the ongoing bull market and economic expansion. While our crystal ball is as foggy as the next person’s, we are optimistic the market and the economy can continue to move in the right direction. Consider that in the post-WWII period, the average bull market and economic expansion both have run for about 48 months. If history is any guide, we are only about halfway through the current market and economic cycle. We remain overweight risk.
- Stocks can continue to shine: Our world view is optimistic and we are overweight equities as we move into the new year, believing that growing corporate profits and still-low interest rates will help push risk assets higher. Also, stocks can manage their way through high inflation and rising interest rates, conditions that have proven historically difficult for traditional fixed income.
- The rest of the world should catch up: Most international markets – both developed and emerging – have badly lagged US equities but are attractively priced on a relative basis. We continue to have meaningful exposure to markets outside the US and think international equities will catch a bid as vaccination rates pick up around the world and the global economy continues to reopen.
Best regards,
Tim Holland, CFA
Chief Investment Officer, Orion Advisor Solutions
The views expressed herein are exclusively those of Brinker Capital Investments, LLC, a registered Investment Advisor, and are not meant as investment advice and are subject to change. Definitions: The S&P 500, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 27 Emerging Markets (EM) countries. With 2,354 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general. You cannot invest directly in an index.