Bumpy Beginning to a New Year

Well, that was fun while it lasted.

Stocks surged out of the gate on Monday, with the Dow Jones Industrial Average and the S&P 500 hitting records to ring in the first trading day of the new year. Then came the midweek release of the Federal Reserve’s minutes from its December meeting, halting the ticker tape in its tracks.

Monetary policymakers sounded more hawkish than analysts expected, with interest-rate increases possible as soon as this spring. The prospect of higher rates has hit growth stocks the hardest—the tech-heavy NASDAQ composite index was down more than 6% from its November high at Thursday’s close and in negative territory for the day on Friday as we went to print.

A mixed December jobs report was a relative bright spot. After a devastating 2020, the U.S. added a record number of positions in 2021 and the unemployment rate declined to 3.9%. Additionally, jobless claims hit 207,000 last week, close to their lowest level in five decades. Although the data was collected before the omicron surge, it wasn’t the only piece of good news for the broader economy this week: Home sales are staying strong and there are signs that supply chains are on a slow mend (more on this below).

This story of the week—an economy that continues to strengthen even as markets face a bumpier ride—may well become the story of the year. Our plan is to remain disciplined, work with managers we trust, and make sure your portfolio allocations align with your objectives and tolerance for risk.

Supply Chains Finally Begin to Unkink

While it’s been a tough start for investors, there are signs that supply chains may be starting to unkink. A survey of manufacturers shows a slow return to normal is in the offing. Respondents indicated that delivery times had decreased, hiring had picked up and prices manufacturers paid for things like raw materials had declined—all signs of supply chain progress. If those trends continue, inflation could begin to ease in the months ahead.

Rate Rise Could Tweak Tech

As noted above, a more hawkish Federal Reserve spurred a bout of selling as traders repriced tech stocks, primarily. A newly aggressive Fed could yield a very different stock market in 2022 compared to 2021. As we’ve pointed out, last year’s strong gains in the major indexes were driven by a handful of stocks—mainly tech (or tech-adjacent) giants with sky-high valuations that were predicated on those firms being the best bet for robust growth in a low-interest-rate environment.

It’s too early to say whether this no good, very bad week for growth stocks means that another turn toward value is in the cards for 2022. But it does seem increasingly likely that this year’s winners (and losers) may be quite different from last year’s.

What Will the S&P 500 Do in 2022?

This week’s reader question is about the outlook for stocks in the year ahead: Can the S&P 500 index keep rising in 2022? If so, where does that leave active managers?

Vice President and Portfolio Manager Steve Johnson:

The S&P 500 index had a blockbuster 2021, returning 28.7% and capping a third consecutive year of double-digit gains. Will it continue? It’s too soon to tell. But as we saw this week, the market does its best to constantly confound the greatest number of people.

At Adviser Investments, we prefer to skip the fortune-telling and focus instead on fundamentals like earnings and interest rates. They are what drive stock prices for quality companies. As the economy continues to rebound from pandemic shutdowns and supply chain snags get resolved, the earnings outlook for the first quarter remains robust and should support stock prices. And despite the hikes coming from the Fed, interest rates are still historically low. As long as cash and bonds offer low yields, stocks will remain attractive.

Last year was difficult for active managers who owned stocks other than mega-cap market darlings such as Apple, Microsoft and Tesla. A lot of the market’s performance was captured in those few names. But we don’t think the concentration will continue to the same extent in 2022. Myriad factors, such as interest-rate changes and a recovering global economy, should offer greater investment opportunities at discounted prices—and provide top active managers with the chance to outperform.

Also, inherent in your question is another question: Whether it still pays to invest in a diversified portfolio that can include foreign stocks as well as bonds. We think so—for the many reasons we’ve noted over the past several months, when it appeared that staying diversified was a losing (or at least a lagging) proposition. We’re hopeful that 2022 proves us right. But we know that whether sentiment shifts away from a focus on the S&P 500 in 2022 or 2023, it will happen. When it does, your portfolio will be well positioned to benefit.

Ask Us a Question!

We’re always interested in the topics or themes you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Chart of the Week: Setting Your Expectations

We monitor a wide range of data to form our outlook on the market and the broader economy—every other week, we’ll spotlight one indicator our analysts have found enlightening or informative.

By Director of Research Jeff DeMaso

At the start of every year, investors are inundated with outlooks and forecasts—most aren’t worth the paper they are written on. Rather than speculate on the future, I like to look back and see what history suggests our baseline expectation should be for market returns.

I examined rolling 12-month returns for the Vanguard 500 Index (as my proxy for stocks), Vanguard Total Bond Market Index (bonds) and Vanguard Cash Reserves Federal Money Market (cash) since each fund’s inception. The record tells us to enter the year expecting gains. Stocks—which should beat bonds, and both should beat cash—were positive in 82% of the 532 rolling 12-month periods, with an average gain of nearly 13%.

In other words, the burden of proof should always be on the pessimists calling for crashes. Sure, they’ll be right from time to time, but most of the time, and over time, the optimists triumph.

Financial Planning Friday
Review Your 2022 Spending Plan

The new year brings new resolutions. This is an opportune time to review your financial goals and aspirations.

Are you expecting any major expenses in 2022? A home renovation or a vacation house purchase? The start of college tuition or a return to travel when the pandemic is under control? Are you concerned that your cash balance or income won’t meet your needs?

If your answer to any of these questions is “yes,” call your wealth management team to review your spending plan for 2022. Even if your answer is “no,” if you haven’t talked with your team recently, we encourage you to do so to either put a sound financial plan in motion or refine your existing one as needed.

After all, it pays to prepare. Take the time today to evaluate your cash reserves and expected income over the next year. (You can use our Budget Worksheet to help figure out where you stand.) If you think you may need to bridge a gap, we’re here to help you strategize.

Any topics you’d like us to address in a future FPF section? Please contact your team or write to us at info@adviserinvestments.com. We’d love to hear your suggestions.

Adviser Investments Can Manage Your 401(k)!

Did you know that Adviser Investments can now manage assets held within your employer-provided accounts, such as your 401(k), 403(b), 457 plans and more, even if you’re still contributing?

Putting these types of accounts under our care can help us create a unified strategy that’s more tax- and cost-efficient while still maintaining your target asset allocation and risk profile. Moreover, the burden of monitoring the performance and rebalancing and trading the portfolio falls to us. Plus, we’re better able to make sure your financial plan is on track when we understand your full financial picture.

Is this something you’re interested in? Your adviser can answer your questions and help you get started.

Adviser Investments in the Media

This week, Chief Investment Officer Jim Lowell appeared on Fox Business to discuss how market opportunities abound in 2022 and on CNBC to talk about the economy’s ability to grow despite omicron.

The ongoing fallout from the RR Donnelley hack remained in the headlines this week, with Chairman Dan Wiener discussing the impact on Vanguard in Ignites, InvestmentNews and RIABiz.

In this week’s Market Takeaways, Research Analyst Liz Laprade told us not to put too much stock in 2022 outlooks, while Steve Johnson offered his thoughts on a hawkish Fed and the NASDAQ’s tumble this week.

Looking Ahead

Next week’s slate includes inflation gauges, small-business owners’ confidence, retail sales and consumer sentiment—to name a few.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.