Markets are like little kids. They want candy, and the minute you try to take the candy away, they have a tantrum
– Mohamed El-Erian, Chief Economic Advisor at Allianz, 2021
The lifecycle of a theme: from “your fears are unjustified” to “why did almost no one see inflation coming?” in less than 12 months
A generally strong quarter for risk assets, especially U.S. REITs and large cap stocks; balanced U.S. portfolios returned 4.1%
Key markets near all-time highs with inflation running well above “target” exposes the impossible challenge policymakers face
Remain diversified and tilted for upside inflation risks (value equities, lower duration bonds, overweight real assets and opportunistic)
My Democratic colleagues in Washington are determined to dramatically reshape our society in a way that leaves our country even more vulnerable to the threats we face. I cannot take that risk with a staggering debt of more than $29 trillion and inflation taxes that are real and harmful to every hard-working American at the gasoline pumps, grocery stores and utility bills with no end in sight.
– Joe Manchin, Unites States Senator and Democrat, West Virginia
Growth and inflation both expected to slow, but to remain above average for next several quarters
U.S. durable goods orders reached a record as demand remains strong; retailers have struggled to build inventories to match demand
The reliance on government transfers over the last few years was astonishing; the hangover from this ending could be harsh
As transfer payments have waned, the consumer has started to dial up leverage, but plenty of room to go...
Inflation is surprising forecasts on a global scale, a first since 2009
Inflation and inflation expectations are still somewhat contained, but any increases would pose a significant risk to the economy and markets
Watch the Treasury market for policy changes: the 2-year Treasury tells you everything you need to know about pending Fed decisions
Adjusted for U.S. housing price appreciation, inflation would be significantly higher due to the lag in reporting of shelter in CPI
Job quits rise, openings fall as restaurants struggle with COVID-19 policy response to rising cases
Companies getting creative in attempts to attract workers in a challenging labor market environment that is very different from the ‘09-’11 recovery
Whether by vaccination, prior infection or both, more than 90% of the population could have a form of immunity
The reaction function and policy response to the pandemic has been significant and unpredictable; Omicron disruptions seem to be waning
“Back to work” hasn’t gone according to plan
Rising energy prices will continue to be a hot topic for consumers and the current administration
Global quantitative easing efforts supported the recent gains in global stocks
Thinking well ahead, if the Fed ever does need to reverse course, they have substantially more options than the ECB and BoJ
Right now, we’re in a raging mania.
– Stan Druckenmiller, Investor, 2021
U.S. large cap stocks outperformed during the quarter; U.S. valuations remain higher than international and emerging markets
Earnings grew at a faster rate than returns in 2021, resulting in multiple compression in the S&P 500
Global EPS growth expectations have slowed; U.S. growth is expected to be higher than the rest of the world in 2022
Quarantine stock basket now trails the broader U.S. stock market over 24 months
Just 30% of the NASDAQ 100 trades above their 200-day moving averages
Growth price optimism not supported by earnings
Historically small cap has been more expensive than large cap, but small cap relative valuations are currently near the lowest levels in recent history
Relative to earnings estimates, emerging & frontier market stocks are cheapest; relative to sales, U.S. Large Cap stocks appear very expensive
A record $230 billion of buybacks in Q3; financials and tech were the two leading sectors, repurchasing a combined $125 billion
Buyback and dividend yields for U.S. large cap stocks rose in the third quarter as buybacks reached a record high
Frothy public markets lead to largest IPO year on record
Pent-up pandemic demand has pushed 2021 venture activity to shatter previous records
Momentum persists at late stage of venture activity
VC-backed tech unicorns were the belle of the IPO-ball in 2021...
...until they flopped in the public markets
By leaving hikes so late in the cycle, the Fed’s predicament puts them at odds with a 30 year history of being accommodative
What Fisher and other former Fed insiders told me is that the stock market rally was no accident. By design, the Fed’s QE program effectively lowered long-term interest rates, making safer investments like bonds less attractive and riskier assets like stocks more attractive. It was hard to argue with the results: Stock prices kept going up.
– James Jacoby, Financial Commentator, Director, July 2021
HYBs and bank loans were top performers; International Dev bonds were a major underperformer as “return-free risk” comes home to roost
In fixed income, we have been (reluctantly) more tactical over the last two years as a result of the pandemic
U.S. Treasury yield curve steepened significantly last year while credit spreads remain at or near historically tight levels
Credit spreads near median across most sectors with limited pockets of opportunity starting to emerge
2021 was 3rdworst year for U.S. bonds since 1989 and 2022 is off to an even worse start
Recent bear flattening, if it continues, could spell the end of this cycle via suggests potential trouble ahead for the Fed and the economy
Treasuries increasingly becoming the largest segment of the now $52 trillion fixed income and credit securities market
The U.S. bond market remains relatively higher yield, which could help keep U.S. rates somewhat contained
The treasury market has been an enabler of increasing deficit spending and debt levels... when will it become a “vigilante”?
Powell is right: this time isn’t like the 1970s...from a capital allocation standpoint, it’s worse
Private debt fundraising bounces back in Q3, but number of funds is on pace for lowest count since 2011
Private debt funds bounced back in Q3, now at more normal allocation levels
We think the energy space is really cheap. What helps is we were not in the energy space before. The amount of capital available in the oil patch is disappearing… [It’s like the] real-estate industry in the early 1990s, where you had empty buildings all over the place, nobody had cash.
– Sam Zell, Equity Group Investments Founder, March 7, 2000REAL ASSETS
Real assets sold off in November initially on uncertainty around Covid restrictions and policy, but rallied into the end of the year
REIT yields may be currently attractive on a relative basis, but in keeping perspective they are at the lowest absolute levels in history
Commodities have outperformed stocks through the COVID-19 crisis
We remain constructive on gold miners
Oil and natural gas producers have been cautious to bring rigs back online despite rising prices
As natural gas inventories started to replenish, prices normalized, but remain elevated
Crude oil inventories have been drawn down each week since November, demand for refined oil remains near multi-decade highs
Midstream yields remain substantially above REITs, free cash flow yields of real assets and infrastructure category remain attractive
Gold miner performance has diverged from fundamentals, the industry has seen broad deleveraging and improving cash generation
Real yields rose modestly, and aggregate amount of global negative yielding debt continues to fall
Excesses in one direction will lead to an opposite excess in the other direction.
– Bob Farrell, Former Head of Research, Merrill
Closed-end funds and hedged equity outperformed for the quarter; global macro had a disappointing end to a lackluster year
Retail mania has mostly faded for now
Tactical opportunities have been working to mitigate volatility while keeping pace with the broader equity market
Muni credit sentiment remains elevated, historically associated with lower-than-average forward returns
While higher profile digital asset prices have cooled off, interest remains high in underlying themes
Bitcoin ETF launch was another “buy the rumor, sell the news” event
Nobody knows how this is going to turn out. This is an experiment.
– Howard Marks, Co-chairman, Founder Oaktree Capital Management, 2021
2021 was an unusual year for global stocks and bonds (and again highlighting the unusual predicament the Fed is in)
Expected 10-year returns for domestic equities fell modestly as valuations rose while expected returns for bonds rose with yields
Some good news: longer-term return expectations hold relatively stable as the mean reversion of higher valuations is distributed over a longer time frame
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