The fourth quarter of 2021 was another positive time for US stock markets. This brought year-end performance well above historic averages. Developed International stocks advanced also, though to a lesser degree. Bond markets struggled again at the end of the year, with the commonly quoted Aggregate Bond Index falling in value.
Inflation became meaningful for the first time in a few decades. The unprecedented levels of stimulus pumped into the economy over the previous two years has been spent faster in 2021. When this excess money went searching for goods constrained by supply chain disruptions, inflation became inevitable. It now appears that it could last longer than just a blip in the chart.
The economy has been growing well below longer-term inflation rates, typically considered healthy in the 3% area. The government has only been publicly targeting 2% inflation over the previous years, while regularly falling short. Therefore, an inflation rate of 4-5% would only be catching us up to the longer-term trend.
None of this has caught us off guard. Managed portfolios take many types of risk into account, with inflation being one of them.
The positive return in stocks was not a smooth ride. Volatility reared its head more than once. To the side you can see that only 57% of the individual days saw positive performance in the S&P 500. Interestingly though, that is completely unremarkable. In fact, over the last 70 years, the S&P 500 is only positive 54% of the days. This serves as a great reminder of the benefits of being patient investors. A down day, week, month, or even year is completely normal. It is even common to see a 10% or greater fall in stocks during years that have positive returns.
Bonds were not the beneficiaries of the above developments. Receiving 2% interest is not very attractive if your spending power depreciates at an inflation rate of 5%. Aggregate and Investment Grade Corporate Bonds each depreciated a percent and a half during the year. Municipal bonds finished in the black, on the suspicion of increasing taxes for wealthy individuals.
This does not completely diminish the value of owning bonds. While it does make them less attractive for longer term needs, inflation is unlikely to plummet their value in short-order. In fact, government bonds have been one of the best performers in bouts of stock market volatility, reminding us of the value of diversification. They can play a valuable role, especially for those that are currently, or soon to be spending, their investment savings.
Advisory Services offered through CG Advisory Services, an SEC Registered Investment Adviser. Securities offered through Geneos Wealth Management Inc. Member FINRA/SIPC.
