2021 is in the books. Despite the fact that Covid-19 is still with us as we head into 2022, I think most will agree that in some ways 2021 was a quiet year. At the same time, it is possible that 2021 will be seen as a pivotal year well into the future. In January of last year alone we saw the accelerating vaccine roll out, watched the events of January 6 unfold, and then swore in the first female vice president. By early last summer the U.S. had withdrawn from Afghanistan (ending the longest war in our history) and the pandemic had all but ended! Political stalemates, supply chain issues, and Covid variants occupied headlines in the second half of the year.
The market in 2021 also told a number of stories. January started off relatively flat, with volatility spiking at the end of the month as power shifted in Washington. In the remaining 11 months of the year, volatility decreased and the U.S. stock market experienced a tremendous rise, with the S&P 500 up nearly 30%. Non-U.S. equities also ended the year in the black, but did not fare nearly as well. The All Country World Index (ACWI) excluding the U.S. was only up about 5% during the same period. This is primarily due to sluggishness in emerging markets.
But, the markets are only one part of the 2021 economic story. While our calendar makes it very easy to measure stocks on an annual basis, the outcome of ongoing supply chain, employment, political, and inflationary issues will likely continue to impact the way we view 2021 and determine what plays out for the remainder of 2022.
Given our role as financial advisors, we believe that of all the current economic issues, inflation is the most central to our clients' long term financial well being. To this end, the questions include: is the level of inflation we saw at the end of 2021 persistent or transitory? What tools can The Fed use to help curb a rising inflation rate? And, most importantly, how might inflation impact your financial plan?
The answer, unsatisfyingly is, it depends!
Using history as our guide we can look at 1980, when inflation for the year was above 13% and the U.S. market was up over 31%. A good sign it might seem. The following year, however, despite lower inflation, the market was down nearly 5%. The two year return of '80-'81 was sill positive, but watching your portfolio in the first year was a lot more fun than in the second.
While there are strategies which seek to capture returns in an inflationary environment, we do not and cannot predict the future. Rather, we look at how a well diversified portfolio may protect portfolio value over a long period of increasing inflation (read: not hyper-inflation) and are bolstered that such a portfolio can maintain or grow purchasing power, even when our dollars in the bank are not going as far as they once did.
We are not recommending any drastic changes today for our clients. We are also not making any adjustments to our portfolios at this time, but we are prepared to act as a clearer picture emerges throughout the year. We continue to view the current economic conditions with a long-term view, through a lens of each client's personal situation and financial goals, and believe this offers the best chance for success.
We hope that 2022 brings you good health and happiness. May this year open new doors for all of us and helps us increase prosperity.
-Open Door Financial