January 12, 2022
Santa Claus Rally - Looking Forward 2022
2021 ended the year with a late mounted Santa Claus rally. Annual results clustered to highs in the S&P500 during the year. The last quarter, and virtually the full year, delivered positive results.
S&P500: Dec +4.47% 2021 +28.68%
DOW: Dec +5.53% 2021 +20.95%
NASDAQ: Dec +0.75% 2021 +22.21%
Russell 2000: Dec +2.23% 2021 +14.78%
The S&P500 average is concentrated in a handful of companies; Apple, Alphabet (Google), Microsoft, Nvidia and Tesla. This group was responsible for almost 30% of the S&P500’s results for 2021.
We expect the first half of 2022 to be volatile and troublesome. Since the beginning of the new year, the market has taken it on the chin in a daily fashion. The NASDAQ suffered the downside in particular. The close to -2% slide in the S&P500 accompanied by a -3.3% downdraft in the NASDAQ composite rounded out the market response.
Tech stocks were crushed. The advancing interest rate message hammered companies with growing revenues and only long-term earnings prospects. Earnings multiples abruptly shifted lower. Roughly 40% of the companies in the NASDAQ index have had their values cut in half from their 52-week highs.
Adding to this volatility was the Federal Reserve minutes, released on Jan 5th, and a shift in Fed policy to combat inflation, which dropped the DOW -400 points. The Fed message brought two steps to the fore. First…the likelihood of 3 or 4 rate increases. Second…decreasing the inflated Fed balance sheet, which has ballooned from $4 trillion to $12 trillion. The Fed pivot was faster than expected. Inflation conditions had changed the oft-repeated Fed warranty.
On the positive side, Financials picked up gains with the assured prospect of higher rates. Energy stocks shifted higher on the pricing outlook of $80 oil possibly moving to $100. The 10-Year Treasury has moved quickly up to the 1.70% yield level.
The “buy the dip” has been helped by comments from JP Morgan’s Jamie Dimon, a respected CEO. Dimon expects exceptional economic returns, exceeding 2021 in 2022. Dimon’s comments coupled with Fed Chair Powell indicating to the U.S. Senate that the Fed would act thoughtfully and not be rushed fueled a solid market rally on Tuesday, Jan 11th.
2022 Portfolio Strategy
In December, and early this month, we added defense to our portfolios by harvesting gains. Cash reserves are exceptionally high. We have added names from the Energy and Materials sectors while increasing portfolio yields. We continue to emphasize the Financial sector in portfolios. These pronounced correctional pullbacks provide opportunities.
Our sense is that economic results will be strong for all of 2022. After a bumpy first half of the year, we anticipate solid market gains for the full year, perhaps in the 10% range.
December 3, 2021
November 2021 Review - Looking Ahead
November Market Picture
On the last trading day of November, Fed chair Powell surprised markets, saying that the Fed was prepared to quicken the taper of easy money policies. At the next Fed meeting, December 15th, a tightening discussion would be on the agenda. Powell suggested that the Fed will adapt amid risk of persistent inflation. The shift in emphasis alarmed markets. Equities, no matter market cap or sector, were down across the board. Coupled with a fresh Covid threat, the impact resulted in the S&P500 pulling back -2%.
Wall Street firms are divided on market prospects for 2022, with fear of advancing inflation and negative real rates. Slower earnings growth, rising interest rates along with supply chain disruptions, will continue to dominate the economic scene. We are not yet out of the woods.
Many are suggesting a stock market bubble, and there are plenty of high beta stocks still well ahead of reasonable valuations. Erratically enhanced option trading only exacerbates the violent price moves. These elements will continue to promote volatility and daily price swings with added risk. Our view is that the S&P500 will approach the 5,000 level in 2022. There is rampant liquidity in the market. The length of cyclical growth of 2-3 years works in investors favor. Volatility will continue. We do expect a Santa Claus rally in the second half of December.
In GN&Co news, we are saying goodbye to Dora Strout this December. We’ll miss Dora! Dora has been with us for over 6 years and was a great addition to our GN&Co family. I know that our clients have enjoyed working with Dora, as have the many other people that have communicated with her on a regular basis. Dora is leaving to help with her husband’s family business in North Reading. Dora will still be assisting us in the transition with our new addition, Matthew Butler.
Matthew will be handling Dora’s role and has a great skill set in dealing with teams and clients. His background at State Street Bank & Co. and at Northeast Retirement Services are a plus for our Firm. We are excited to be able to add Matthew to our team and I’m sure our clients will enjoy getting to know him.