DWM's 4Q21 / Year-End Market Commentary

January 11, 2022

Happy New Year! But really we should be saying “Thank you, Last Year” at least when it comes to portfolio returns evidenced by strong results in both the equity and alternative asset classes. Ironically, just several trading days into the New Year, the landscape has seemed to significantly change. But before talking about what’s next, let’s celebrate… (Remember all of those awards that they’d give out in grade school like “Most Likely to Become President” or “Perfect Attendance”?!? Seems over the years, that they just want to hand out an award to every kid, however ridiculous it is, for example, “The Upbeat Attitude Award” or “The Determined to Finish Award”. So in that mindset for this market commentary, I have decided to hand out some awards and celebrate some of last year’s results):


Equities: On the surface, it would appear that the stock market really shined in 2021. But if you look under the hood, there was a ton of dispersion within. The US stock market gets the Leader of the Pack Award (S&P500 up 11.0% 4Q21 & 28.7% YTD), while developed international markets received the Most Likely to Succeed Someday Soon Award (MSCI AC World Index Ex-USA up 1.8% & 7.8% YTD), with emerging markets getting the Clunker Award (MSCI Emerging Markets -1.3% 4Q21 & -2.5% YTD). It should be noted that whereas the S&P500 has also been the Most Dependable the last several years, there are many reasons to believe that trend may be ending. First, the S&P500 is a market-cap weighted benchmark where the “big boys” at the top like Microsoft, Apple, Alphabet (Google’s parent), and Tesla have really driven the benchmark’s return. Those names plus another company, NVidia, made up over 32% of the benchmark’s return in 2021. The top 25 stocks driving the S&P500 represented over 55%!* A couple of take-aways from this: 1) most stocks experienced much more muted returns in 2021 and did not experience eye-popping returns like this relatively small sample, 2) valuations on most of the “big boys” and other 2021 “hot” areas are at historically high levels – one may even say bubble-like territory – but fortunately there are many areas within the equity market like international developed and emerging markets that are downright bargains. So we don’t expect a total stock market meltdown, but we wouldn’t be surprised to see some specific area corrections and “rotation”. More on this below.  

Fixed Income:  Fixed income received the Dud Award for 2021 as it was a rough year for bond investors. In fact, 2021 was just the 4th down year for bonds in the last 45 years, with the Barclays US Aggregate Bond Index unchanged in 4Q21 & -1.5% YTD and the Barclays Global Aggregate Bond Index down 0.7% 4Q21 & -4.7% YTD! Negative returns can and will happen when rates move up quickly, evidenced by the 10-yr Treasury Note yield moving up from its 12/31/2020 close of 0.9% to its 12/31/21 close of 1.5%!  With all indications that the Fed will increase interest rates at least 3 times in 2022 and maybe more, don’t expect any stellar fixed income returns in the near future. The math just simply isn’t there. That said, the fixed income asset class still serves as a protector piece in one’s portfolio.

Alternatives:  Achieving the Most Improved Award would be the alternatives asset class, as represented by the Wilshire Liquid Alternatives Index (“WLAI”) up 0.6% in 4Q21 & 4.7% YTD. The basket of liquid alternatives we follow did a little better powered by real estate** (up 5.4% 4Q21 & 22.4% YTD) and commodities*** (up 2.6% 4Q21 & 19.2% YTD). With the fixed income asset class expected to perform significantly less than historically in this current economic cycle, the alternatives asset class provides another area of possible enhanced returns and diversification benefits for one’s portfolio. 


To sum up 2021 for investors, it was really all about allocation. The more you had in equities, the better you did. The more you had in fixed income, the lower your overall return. Thus, those with more aggressive portfolios came out of 2021 feeling like that they won the Big Cheese Award while those with more conservative portfolios must be content with the Best Character Award. That said, looking forward, it does not appear like risk-taking may reward in the same fashion. In fact, all the hoopla now is about inflation - headline CPI now close to 7%! - and how quickly and how much the Fed is going to raise interest rates in an effort to combat this inflation.

We’re only several trading days into the New Year, and the environment feels drastically different. Interest rates have soared, evidenced by the 10-Yr yield now 1.8% as of the time of this writing vs the 1.5% at 2021 year-end. That’s the bond market interpreting the Fed making a quick change from a dovish to hawkish stance. In other words, the Fed is in the midst of taking the fiscal stimulus “punchbowl” away and instead are tightening the muzzle on the inflation dragon in an effort to get it under control. Thus, the Fed gets the Better Late Than Never Award. We already know what this type of policy can mean to fixed income, but this also has a huge effect on stocks, particularly growth ones. Just take a look at the equity style box returns from the last week below.

US Equity returns from 1/1/22 – 1/7/22

You may ask “why are higher interest rates bad for stocks, particularly growth stocks that trade at hefty P/E multiples?” Answer: Rising yields can hurt pricey stocks in particular because higher yields pressure the value of companies’ future cash flows. And future cash flow is perhaps the biggest factor in how stocks are priced. Further, higher yields can create other opportunities outside of stocks with less risk as to where investors can park their money, thereby lessening capital flow into stocks.

To further expand on this, the value vs growth trade has been discussed a lot the last year plus, with value outperforming for a short period only for growth to bounce back a few times. But this time is really different given the state of inflation and a Fed that has quickly gone from dovish to hawkish. Let this be a warning for the momentum traders out there who may have never seen this type of market cycle. As we say here at DWM, diversification is your friend. It’s a very challenging environment we are currently in, i.e. many stocks are trading at historical high valuations but overall equities can still be seen as cheap relative to bonds that are yielding negative real yields. (Real yields = nominal yield – inflation.) So what is one to do? Now more than ever is a time to make sure your portfolio is following a disciplined, diversified strategy that not only employs growth but also value exposure within the various equity investment styles including not just domestic large cap, but domestic mid and small cap as well as international developed and emerging markets while also utilizing multiple asset classes including alternatives, just like we do here at DWM.

Lastly, we would be amiss to not recognize the Most Likely to Keep Messing Things Up Award which goes to Covid. Many parts of the economy have adjusted to being able to operate in a pandemic environment, but economic growth might slow from fresh waves of Covid cases caused by new or existing variants.

In conclusion, after a 2021 which should be deemed by many as a successful year for their portfolio, we enter 2022 with several challenges already noted above. Not to mention, that corporate earnings (which for the S&P500 rose 45% in 2021) have to come down to earth, expected to be about 9.4% in 2022, but still much higher than the -0.01% in 2019, the last full year before Covid reared its ugly head. Good news is that there are a lot of positives. Besides the ones mentioned above…

  • Supply-side constraints are lessening which should bring goods inflation in
  • There could be drastic improvement in the labor force once we get past this Omicron variant
  • After all this stimulus, not to mention strong portfolio returns; household balance sheets may be in the best shape ever…
  • Which leads to lots of household demand
  • Corporate balance sheets and demand are also potent
  • There is still an unprecedented amount of cash in the banking system which will flow into the markets

We had a great New Year Resolution blog last week. Another resolution not mentioned in that blog but gets the Captain Obvious Award is: don’t let your emotions get in the way and stay disciplined with your investing by working with a proven wealth manager. At DWM, we’re happy to be your captain, Captain Obvious, that is!  Oh, forgot about one last award we’d like to hand out: the VIP award goes to you, our client! Thank you for being you!

Brett M. Detterbeck, CFA, CFP®


*Source: FactSet, Goldman Sachs Investment Research
** represented by the Easterly Global Real Estate Fund
*** represented by the Eaton Vance Parametric Structured Commodity Fund

Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page