By Tim Courtney, Chief Investment Officer
Over the last year and a half, investors have been heartened by the economy’s recovery, record profits and profit margins and the market’s practically uninterrupted rise. Household finances have been healthy and many companies have emerged from the 2020 recession with a focus on increased productivity and preparedness for the next recession. However, at the same time, many have become concerned that market prices may have run ahead of themselves.
The broad market indexes have risen over 100% since the March 2020 bottom. This magnitude of rise over 20 months, while very rare, has happened a few times before. What hasn’t happened before is this kind of quick rise without one or more market corrections of 10% or more.1 This current run has produced some volatility and minor pullbacks, but almost as quickly as they have appeared they have dissipated.
Most major asset classes are up – not just equities. Commodities and cryptocurrencies are among the strongest asset classes in 2021.2 Real estate is also performing well, with home prices having grown a record 19.9% between August 2020 and August 2021.3 Real estate investment trusts (REITs) are up as well, despite concerns over decreased travel and need for office space. There are a few negative returners, like investment grade bonds and gold which are slightly negative and Chinese stocks which are strongly negative.
While some of the price increases are justified by fundamentals that have improved since the pandemic began, a portion of the increases have been driven by central banks’ low rates and bond buying. The environment has been very pleasant for investors with low inflation, more than accommodative policies and an accelerating economy following the pandemic lockdowns. During this time market volatility has been generally low.
The environment is changing, however, with inflation at nearly 7%4, central banks beginning to take action to control it and an economy that is slowing to more normal growth levels. These changes very well may have the effect of raising market volatility and potentially initiating a market correction, which we know will come at some point. The “when” is unknowable and, relying solely on history as a guide, you would have expected one or two market corrections already.5
At Exencial, we remain committed to investing in productive companies across the globe that provide goods and services people use daily. We shouldn’t be surprised by higher volatility in 2022 and should be ready to revisit allocations to ensure investors are holding an appropriate amount of preservation assets, like cash and bonds, based on their situation. Please call us with any questions you may have.
Please note: Exencial offices will be closed on Christmas Eve and New Year’s Eve, although markets will be open on 12/31/21 and Exencial’s trading team will be operating that day.
Sources:
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.