January 1, 2022
Will the Aging Bulls Make it a “Four-Peat?”
Dear Clients and Friends,
This holiday season many Americans gave gifts, unwrapped presents, and checked their stockings. As we wrap up another calendar year, many investors checking their stocks have noticed that markets have delivered bountiful gifts over the past three years. The U.S. bull market has achieved a three-peat, trouncing other developed and emerging markets and generating a total return of 26% per year since early 2019.
As we enter 2022, investors are hoping that the U.S. bulls, similar to Chicago Bulls basketball fans of the past, will execute a “four-peat” performance. The next twelve months will determine if the Equity Bulls might succeed where the basketball Bulls struggled.
History suggests that four-peats, while rare in professional sports, are more common when it comes to equity markets. This quarterly letter will explore whether the clock is ticking down on a maturing U.S. bull market, or if steady profit growth and low interest rates will support another year of above-average returns.
Why have U.S. stocks been on a winning streak?
The three-peat began in January of 2019, following a sharp market decline in the fourth quarter of 2018. Since the initial shock of the pandemic in February and March of 2020, U.S. stocks have surged on rising corporate earnings, lower expectations, and favorable year-over-year comparables. Our view is that S&P 500 companies have performed well during the COVID era for two reasons: 1) Rising demand for physical goods and technology and 2) Massive efficiency gains. Said another way, blue chip companies are selling more stuff at higher prices, while managing their own costs.
During this three-year period, other markets performed well, but generally trailed the S&P 500. An index of global stock markets excluding the U.S. was up approximately 15% during the past three years. U.S. companies have generally grown earnings faster than their offshore peers, and sentiment has remained elevated for U.S. stocks relative to international markets, where investor sentiment has been soft for over a decade.
What’s the scouting report for next season?
Can the U.S. market make it four-in-a-row against offshore markets? While this may seem like a daunting challenge, the U.S. market has actually seen multiple winning streaks in the 1940s, 1950s, and the 1990s when stocks generally rose 20% or more for at least four consecutive years.
Looking ahead to 2022, market tailwinds include steady economic growth, generally favorable interest rates, and company profits that could meet or exceed investor expectations (especially if tight supply chains and job markets loosen up).
However, we also see headwinds that could break the streak. The global economy is gradually digging out of the pandemic, but we are likely beyond the sharpest rise of the economic recovery. Manufacturing and housing, which have been running hot since early 2020, may cool and weigh on cyclical parts of the market such as industrials, energy, and financials. From a policy perspective, 2022 should see a slow-down in fiscal spending and a Federal Reserve poised to continue to tighten financial conditions including interest rate hikes. Stock market gains over the past three years could turn into this year’s pain, as investor sentiment remains red hot, so any disappointments in earnings or economic conditions could trigger selling.
FBB’s game plan for 2022
We are cautiously optimistic that risk assets such as stocks may perform in-line with historical trends and at least offset inflation. With relatively low bond yields, we continue to favor full equity allocations, especially since blue chip companies are generating mid-single-digit (or better) earnings growth and paying dividends that are just below the 10-year U.S. Treasury yield. Even if the U.S. market struggles to make a four-peat, we still view U.S. stocks as a favorable long-term investment.
We continue to evaluate other opportunities such as smaller U.S. companies and developed non-U.S. equities. We currently recommend modest exposure in those areas, but we may become more constructive especially if small cap and international stocks demonstrate stable profit growth at more reasonable valuations. Additionally, when interest rates start rising, we may look to reallocate portfolios back towards additional fixed income.
As we enter the New Year, we will be focusing on the headwinds and tailwinds impacting the economy, corporate profits, and stocks. A four-peat would be a great success for U.S. markets, but even more modest performance would help portfolios offset inflation and allow sentiment to drift back to more typical levels. We continue to monitor global capital markets and search for additional investment opportunities that meet our core investment principles, remaining ever mindful of your goals and objectives.
Wishing you a healthy and prosperous New Year,
Michael Bailey, CFA
Director of Research
Michael Mussio, CFA, CFP®
*A note regarding 2021 Tax considerations. We expect custodians to have the first round of 1099s out by mid-February. As in years past, we advise against filing early as the odds of corrected 1099s well into March are likely. A special note for Altius clients: A number of funds paid capital gains distributions late in December. To the extent we were able, we offset these gains with losses, we did so via our routine tax loss harvesting process.
While we reviewed opportunities for tax loss harvesting across all FBB and Altius client portfolios, we have been limited in both the number of positions and amount of losses available to take—which, of course, is not a bad problem to have. If you have changed tax preparers and you would like us to update our information so that we can share tax documents directly, please reach out to your portfolio manager or operations team member directly.
All opinions expressed in this newsletter are not intended to be a guarantee or forecast of future events, do not constitute a solicitation to buy or sell securities nor are they a complete description of our investment policy, the markets, an investing strategy or any securities referred to in the newsletter. Opinions expressed herein are not intended to be used as investment advice and are subject to change without notice based on market and other conditions. Different types of investments involve varying degrees of risk, and there is no assurance that any specific investment will either be suitable or profitable for a client's or prospective client's investment portfolio, and no one should assume that any information presented here serves as the receipt of, or a substitute for, personalized individual advice from FBB Capital Partners, its research team or its portfolio managers. The value of investments and the income from them may fluctuate and can fall as well as rise.