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A MESSAGE FROM ASHFIELD REGARDING COVID-19
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2021 Was a Recovery Year

February 15, 2022 | Reflections on the Past Year and What May Lie Ahead

The major indexes finished with an impressive total return for US stocks of 28.7%, a notable 11.7% for international stocks and an unimpressive year for bonds at -1.5%. By the close of 2021, the long-term average on large-cap US stocks remained the strongest area for public market investment.

Strong performance was underscored by a two-pronged government stimulus that flooded the financial system with both monetary support from the Federal Reserve in the form of suppressed borrowing rates and fiscal stimulus to support states, localities and individuals.

The two-pronged approach certainly kept consumers spending, more so on physical goods than on services like global travel and restaurants, which remain weak sectors today. Unfortunately, the eager demand for physical goods collided with the roadblocks of too few truckers, service workers and inventory, creating supply chain bottlenecks and an upward spiral in the costs for labor and products. This spiked prices and delayed delivery times noticeably by year end.

2021 showed us that investors stayed optimistic from a very robust economic recovery. Near-zero interest rates encouraged investors to seek out higher-returning assets. Stock market prices, real estate values, credit card spending and auto purchases all have benefitted from near-zero interest rates throughout the crisis. As a result, our new year opened with inflation and concerns for when and how the Fed will react.

Early 2022 is a Transition Time for Markets

Markets are forward-looking, and investors know that the Fed’s monetary support will inevitably end. The prospect of sooner-than-expected interest rate increases kicking off in March, and a shrinking Fed portfolio to reduce inflation, led to a selloff in stocks at the start of the year as investors are less willing to pay a high price for risk assets that enjoyed a boom last year. While the Fed is correct to normalize what have been highly accommodative monetary policies, the uncertainty and volatility for this year rest on investors’ confusion over how much and how quickly the Fed will make changes. A hawkish view underscores a rising interest rate environment imminent for tamping down inflationary pressures. The dove-ish position considers that the economy will self-regulate and less intervention is needed.

We believe inflation will peak at just over 7% and subside by year end as supply chain disruptions, goods and services spending, and labor conditions normalize. Company earnings reports continue to surprise on the upside, demonstrating the strength of business conditions. January’s market turbulence doesn’t mean the economy is about to be derailed. Rather the start of 2022 is showing us that the recovery after a pandemic-induced recession is moving into a new stage.

If we look back over periods when the Fed first started raising interest rates during an economic cycle, market volatility picks up. We can also look at how markets have performed following those first-rate hikes. These charts provide historical references only and can’t predict future expectations on returns, but economists are forecasting a strong year of GDP growth and company profits. This should support a positive year for the stock market in 2022.

Prospects for Areas of Investment

Where does the economy stand on getting back to “normal” again? What businesses will thrive and which trends will further create opportunities for investments?

Macro data is mixed. Manufacturing numbers continue to signal an expanding economy. December retail sales contracted, as did airline travel and lodging due to the ever-present threat of COVID variants. But consumer demand is expected to pick-up as the wave of infections and hospitalizations subsides. Small business surveys report that company spending and investment is climbing, particularly on physical assets like machinery, buildings and technology. As these investments pick up, we anticipate further market growth.

Traditional cyclical stocks tied to economic recovery have led the market so far in 2022. Banks and oil companies are outperforming. Tech firms have lagged the broader averages during January’s selloff as rising interest rates impact their current stock valuations. But the long-term value proposition of technology remains intact. Secular trends like data analytics, digitization, automation, artificial intelligence and software productivity will continue to be transformational.

Guiding principles that should underpin your investment strategy:

  1. Disciplined research that will identify high-quality companies with responsive and flexible management able to adapt and execute under changing conditions.
  2. Discern what is sustainable. Companies with a strong competitive market position, talented management, innovative and stable cashflow will prevail.
  3. Keep a long-term perspective. The retreat in January is far from the magnitude that warrants a full reassessment of investments. In fact, this pull-back is modest as compared to drops we have seen over the past decade. Further we believe this drawdown is consistent with our expectation for future measured growth going into 2022.

 

Key Take-Aways and What to Expect for 2022

  • The market and economy will continue to expand.
  • There is ample opportunity for stocks to recover and rally during the upcoming year.
  • Uncertainty will linger.
  • Be prepared for volatility.
  • Volatility and “sell-offs” offer buying opportunities to add new stocks or add to existing quality investments.

We will stay focused on your long-term investment goals and make changes as opportunities present themselves.  As always, we welcome your questions and comments.

Click here to download a copy of this commentary.

 

 

The opinions expressed herein are strictly those of Ashfield Capital Partners, LLC (“ACP”) and are subject to change without notice. The information contained herein is for discussion purposes only designed to highlight various market information. While ACP believes all the information is from reliable sources, no representation or warranty can be made with respect to its completeness. Any projections, market outlooks or estimates in this presentation are forward-looking statements and are based upon internal analysis and certain assumptions, which reflect the views of the ACP and should not be construed to be indicative of actual events which will occur. As such, the information may change in the future should any of the economic or market conditions ACP used to base its assumptions change. Past performance is not indicative of future results.

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