January 2022 Newsletter to Clients

Enjoy this month’s edition that features a review of the stock and bond markets in 2021, a reminder of the benefits of diversification, a note about TD Ameritrade tax statements, and an invitation to schedule a meeting with us.

In our September, 2021 newsletter we listed the predictions for the stock and bond markets of six market strategists that had been surveyed by Barron’s magazine. The six were Christopher Harvey of Wells Fargo, Saira Malik of Nuveen, Lori Calvasina of RBC Capital Markets, Mike Wilson of Morgan Stanley, Michael Fredericks of Blackrock Multi-Asset Strategies and Gaurav Mallik of State Street Global Advisors. Let’s see how their predictions for the remaining portion of 2021 fared:

Stocks: On September 13 when the newsletter was written, the S&P 500 index was valued at 4468. The average predictions of the six surveyed was a year-end value of 4585. The index of large U.S. companies finished the year at 4766 – almost 4% higher than their predictions. While they only had to predict the stock market performance over the last 3 ½ months of the year, they still collectively missed the mark by 4%!

For 2022, the group predicted the index will rise 6% from their 2021 prediction and finish near 4800. As we noted in September and it bears repeating here, it is not at all unusual for stocks to tumble 10% or more during the year and still finish up at the end. It’s also not at all unusual for stock market “experts” to be wrong.

Bonds: We typically use the 10-year U.S. Treasury note as the proxy for bond yields, similar to using the S&P 500 as proxy for the U.S. stock market. The yield on the 10-year was 1.33% as of Monday, September 13. This means the 10-year pays 1.33% in interest based on the bond’s current price. Barron’s six strategists predicted bond yields would finish 2021 at around 1.65%. It ended the year at 1.52% - a miss of 8.5%.

For 2022, the experts predict bond yields to hit 2.0% by the end of the year.

Diversification: We preach the virtues of portfolio diversification endlessly. Why? Because predicting the direction of the stock market is not only difficult, it’s probably impossible. If Warren Buffett admits he can’t do it, why should anyone else think they can? And, as we just saw, six people who predict the market for a living couldn’t accurately predict an outcome over just 3 ½ months.

As a result, we diversify yours, and our, portfolios to help smooth out the ride. For instance, the real estate sector led all other major asset classes in 2021 returns. We include real estate in most clients’ portfolios in order to take advantage of its propensity for large average annual returns. We do so in small bites, however, because real estate is a volatile asset class – moving up and down at larger rates than any other. According to J.P. Morgan, real estate has experienced more volatility than any asset class as measured by standard deviation – how much higher and lower than its average annual return it moved – at 23.2% over the last 15 years. So, as its average annual return over that period was 7.5%, roughly 2/3 of those years it fluctuated between 30.2% up or 15.7% down. By comparison, large U.S. company stocks’ standard deviation over that same period was just 16.9%. We want exposure for the potential gains but limit that exposure to try and limit portfolios’ large up and down swings.

TD Ameritrade tax statements: For those of you who own taxable accounts such as Joint or Individual investment accounts, TD Ameritrade has notified us that the very first wave of Form 1099 statements should be available about January 22, 2022. As they are prepared in waves, some won’t see statements until early February and others near mid-February. You may find these documents in your Moneywatch portal as soon as they’re available and they will be mailed as well.

Meetings: The first of the year is a great time to look back on 2021 and make plans for the upcoming year so please let us know if you’d like to get together and catch up.

Thank you for your continuing confidence.