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2021 – The Second Act of a Drama that Began in 2020

It would seem to be counterproductive to look at these past 12 months in isolation. They were, rather, the second act of a drama that began early in 2020, the precipitant of which was the greatest global public health crisis in a hundred years.

The world’s governments chose to respond to the onset of the pandemic by shutting down the global economy—placing it in a kind of medically induced coma. In this country, we experienced the fastest economic recession ever, and a one-third decline in the S&P 500 in just 33 days.

Congress and the Federal Reserve Bank responded all but immediately with a wave of fiscal and monetary stimulus which was without historical precedent. This point cannot be overstressed: we are amid a fiscal and particularly a monetary experiment which has no direct antecedents.

This renders all economic forecasting—and all investment policy based on such forecasts—hugely speculative. I infer from this that if there were ever a time to just put our heads down and work our investment and financial plan—ignoring the noise—this is surely it.


A Banner Year and A New Year

The year 2021 was a banner year for investors. The broad-based S&P 500 Index, which is made up of 500 larger U.S. companies, finished the year up +26.9%. If we included reinvested dividends, the index advanced +28.7%, according to S&P Dow Jones Indices.

Much better-than-expected corporate profits (Refinitiv), which were powered by an expanding economy, plus a super easy monetary policy from the Federal Reserve, deserve much of the credit.

Low interest rates, low bond yields, and rising profits easily offset worries about the lingering pandemic and much higher-than-expected inflation.

But we are now looking ahead into 2022. What might the new year bring? After last year’s strong advance, what might be in store for this year?

Since 1950, there have been 26 years in which the total annual return of the S&P 500 Index exceeded +20%, according to data provided by the NYU Stern School of Business. In the following year, the S&P 500 Index advanced 20 times, or +77% of the time, in line with the long-term average.

The average up year was +18.1%, while the average down year was -6.4%.

It’s an interesting exercise, but let’s always remember that past performance is no guarantee of future performance. Each year will have its own distinctions.

We could add one more wrinkle. The total return of the index has doubled over the last three years, according to Dow Jones Indices.


The Biggest Forecasting Error in the
107-Year History of The Fed

Federal Reserve (FED) Chairman Jerome Powell said last week that the economy is both healthy enough and in need of tighter monetary policy.

That likely will entail interest rate hikes, tapering of monthly asset purchases and a smaller (FED) balance sheet. (Instead of buying trillions of bonds injecting trillions into the money supply, the Fed will be selling bonds to the banks thereby reducing the supply of money).

Powell made the comments during a confirmation hearing in which key senators indicated they will be supporting him for a second term.

We then heard from four of the Federal Reserve Open Market Committee (FOMC) members who told us to expect four rate increases starting in March.

At the beginning of 2021, the Fed expected no rate hikes in 2022. One-year ago inflation was just +1.4%. Last week we learned inflation is now +7%. What Fed forecasts came remotely close to predicting this? NONE.

This is about the biggest forecasting error in the 107-year history of the Fed. And last week the bond market’s response was epic. The 30-year US T-Bond data goes back to 1973. It was the worst calendar week total return in at least 49-years of history! The long bond lost -9.4%!! If this was a year, a -9.4% total return loss would be the 5th worst year ever.

Fixed income is no longer a safe investment. With interests so low, higher rates will lead to capital losses. Last week’s loss was -9.4%.

US Consumer Price Index

Inflation (CPI) is way ahead of the market (10-Year Yield).


What’s Ahead?

If 2020 was the year of the virus, 2021 was the year of the vaccines. Vaccination as well as acquired natural immunity are in the ascendancy, regardless of how many more Greek-letter variants are discovered and trumpeted to the skies as the new apocalypse. This fact, it seems to me, is the key to a coherent view of 2022. In general, I think it most likely that in the coming year:

  • the lethality of the virus continues to wane,
  • the world economy continues to reopen,
  • corporate earnings continue to advance,
  • the Federal Reserve begins draining excess liquidity from the banking system, with some resultant increase in interest rates,
  • inflation subsides somewhat, and
  • barring some other exogenous variable—which we can never really do—stock values continue to advance, though at something less (and probably a lot less) than the blazing pace at which they’ve been soaring since the market trough of March 2020.

Please don’t mistake this for a forecast. All I said, and now say again, is that these outcomes seem to me more likely than not. I’m fully prepared to be wrong on any or all the above points; when I am, my recommendations to you will be unaffected, since our investment policy is driven entirely by the plan we’ve made, and not at all by current events.

With that out of the way, allow me to offer a more personal observation. To wit: these have undoubtedly been the two most shocking and terrifying years for investors since the Global Financial Crisis of 2008-09—first the outbreak of the pandemic, next the bitterly partisan election, then the pandemic’s second major wave, and most recently a 40-year inflation spike.

You might not be human if you haven’t experienced serious volatility fatigue at some point. I know I have.

But like that earlier episode, what came to matter most was not what the economy or the markets did, but what the investor himself/herself did. If the investor fled the stock market during either crisis—or, heaven forbid, both—his/her investment results seem unlikely ever to have recovered. If on the other hand he/she kept acting on a long-term plan rather than reacting to current events, positive outcomes followed. It was ever thus. I expect it always will be.

Very truly yours,


Sources: Historical S&P 500 Index and dividends: “S&P 500 Earnings History, NYU Stern School.” Consensus 2021 earnings forecast: Yardeni Research. Consensus 2021 dividend forecast: Bloomberg. Consumer Price Index: Current net profit margin of the S&P 500: FactSet.

Important Disclosures About Performance Reports
Past Performance is not Indicative of Future Results.

No representation is being made that any investor will or is likely to achieve results like those shown. The results presented reflect past performance and should not and cannot be viewed as an indicator of future performance. The results shown are not an indicator of the returns a client would have realized or will realize in relying on any model mentioned.


ValueAligned® Model Portfolio (VAP)
Past performance does not guarantee future results. Performance of clients invested in accordance with the Model Portfolios will vary from the posted performance due to advisory fees, timing of the deduction of the advisory fee, market fluctuations, trading costs, portfolio cash flows, custodian fees, and frequency and precision of rebalancing. As with any other investment, there is potential for profit as well as the possibility of loss investing in our Model Portfolios. There are inherent limitations in model results, particularly the fact that such results did not represent actual trading and that they may not reflect the impact that material economic and market factors might have had on the adviser’s decision making if the adviser were managing clients’ money.

The ValueAligned® Model Portfolio (VAP) performance information presented and discussed pertains to a model portfolio available for clients of ValueAligned Partners, LLC on the Folio Institutional platform.

Performance is based on a model Folio and does not constitute a composite for purposes of GIPS reporting. Cash distributions (e.g., dividends, capital gains, returns on capital) earned in a model Folio are automatically reinvested into the securities that paid them. Models are not validated or audited.

Performance is calculated using a time‐weighted rate of return using daily valuations. Model Folio returns are calculated using the same methodology used on the Folio site to calculate performance for funded Folios in investor accounts—the Mid‐Weighted Dietz Method. At launch, each model Folio has a hypothetical market value, which then changes over time based on the changing value of the underlying holdings. Corporate actions such as dividends, splits, spin‐offs, etc., are processed in the same fashion as for funded Folios, with hypothetical money, and shares exchanged rather than real dollars or shares. Model corporate actions are not validated or audited, which may result in errors in the performance results presented. Cash distributions (i.e., dividends, capital gains, returns on capital) earned in a model Folio are automatically reinvested into the securities that paid them.

Model performance considers the payment of dividends and distributions. Performance calculations for ETFs and mutual funds are based on market value and net asset value, respectively. Model performance reflects the fees and expenses of the underlying mutual funds and ETFs.

While most of the clients have invested their portfolio in accordance with one or combination of our Model Portfolios, some clients have customized portfolios, which contain securities that differ from what is portrayed in our Model Portfolios. This may result in performance figures materially different from the figures portrayed in the model.

When Model Folios are rebalanced, buys and sells are calculated to return the model Folio to its target weights—these hypothetical transactions assume a full execution of the shares needed at the closing prices on the day of rebalance. When the buys and sells cannot be offset exactly the resulting cash difference is hypothetically invested into FDIC insured bank deposits. In most cases, this cash investment is a negligible portion of the model and will be hypothetically invested in the model holdings (if possible) in the next rebalance. For all model performance results, there are inherent limitations which investors should understand. Unlike an actual performance record, model results do not represent actual investment performance or trading. Since the trades have not been executed, the results may under‐ or over‐compensate for the impact, if any, of certain market factors, such as the effect of limited trading liquidity.

The S&P 500 Index: The performance and volatility of the S&P 500 may be materially different from the individual performance attained by a specific investor in the funds and accounts managed by ValueAligned Partners, LLC. Also, the funds’ and managed accounts’ holdings may differ significantly from the securities that comprise the S&P 500. The S&P 500 has not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather is disclosed to allow for comparison of the investor’s performance to that of a well‐known and widely recognized index. You cannot invest directly in an index (although you can invest in an index fund that is designed to closely track such index). While model performance may have performed better than the benchmark for some or all the periods shown, the performance during any other period may not have, and there is no assurance that, model performance will perform better than the benchmark in the future.