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Q4 2021 Market Commentary
Scott Hohman, CFP®, AIF®
The S&P 500 posted a gain for the 7th quarter in a row during the three months ended December 31, 2021[i]. The index gained +10.65% for the quarter and +26.89% in 2021. Since the March 23, 2020, low, at the height of Covid-19 fears, the index closed the year up +113.02%.
Can the S&P 500 make it eight quarters in a row of gains?
Momentum is a powerful force in markets and the economy. One of the factors behind our portfolio design seeks to take advantage of the momentum. We have learned over the years that when the rate at which expected earnings are improving, stock prices typically rise and vice versa.
The improvement in expected earnings waned in the last six months of 2021 as increasing inflationary pressures and global supply chain disruptions had an adverse impact on corporate bottom lines. Given that the S&P 500 finished the year near all-time highs, it is our view that there is a reduced margin of safety for investing in stocks as we enter 2022. We highlight the weakening overall S&P 500 EPS expectations and rising stock prices with an “alligator jaw” opening in the chart below.
This divergence is what led us to rebalance in early October 2021 to take profits and slightly underweight equities. It is possible, and we are hopeful, that inflation and supply chain disruptions will abate, covid fears will subside and the Fed will keep monetary policy accommodative. If these scenarios play out as outlined, given the strong demand in our economy, we could see the earnings data improve and provide more strength to the markets. Given that the data isn’t providing these outcomes at this time, we do not want to rely on hope, hence our suggestion to capture gains and be somewhat cautious.
Ultimately, our view is that owning equities provides an advantage over the long run, and staying disciplined with your target asset allocation makes sense. While there may be reasons to be cautious in the near-term, no one knows what the future holds, and it does not mean that we believe investors should deviate sharply from this discipline.
As always, we look forward to our next conversation.
Take a look at our Quarterly Market Review for insights on statistics and trends in domestic and global stock markets.
The views expressed represent the opinion of Resolute Wealth Advisor, Inc. (RWA). The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While RWA believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the RWA’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.
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