My year end review of 2021
Sumit Kumar
2021 Review - A Year of Transition
Transition is the process by which a system moves from the current familiar state to a new and unfamiliar one. Transitions are rarely smooth because the new end state is never truly known a priori. It is a process that is characterized by volatility and instability as the system lurches back and forth trying to absorb the impulse forcing change. The year 2021 was clearly A Year of Transition.
Many of the dominant influences in our lives experienced transition in 2021. COVID-19 transitioned from a novel, fearsome disease to one that can be managed. A quick glance at a chart of daily COVID infections during 2021 clearly shows how volatile this transition has been. US democracy experienced a massive seizure from the riot at the Capitol on Jan 6. This was politics trying, and momentarily failing, to absorb the deterioration of faith in institutions combined with a bias confirming, micro-targeted media ecosystem whose business model is dependent on inflaming rather than informing audiences. Finally, as the economy transitioned from shutdown to reopening it tried to assimilate several massive changes to its underlying structure, any one of which would be significant, at the same time. The relationship of workers to work, where and how we work, movement of goods, the composition of energy production and understanding the dynamics of wealth inequality are just a few that come to mind. The single metric encompassing all of these issues and the many more not listed is inflation. For the first time in 40 years, beyond the living memory of most Millennials and all of Gen Z, prices of goods and services are rising significantly. However, it is my view that as the global economy trends back towards a new equilibrium inflation will diminish. Innovation and digitization, the two major forces that drive the economy, are inherently deflationary and remain as powerful as ever.
It is a testament to the resilience of the US and global economy that despite all this upheaval most equity markets continued to move higher. The SP500 returned approximately 27% in 2021 and completed its 3rd straight year of double digit returns. While I never make predictions about market returns I do identify what is going to be the major impulse they will have to absorb. For 2021 it was how COVID-19 would evolve. For 2022 it is how the Federal Reserve's transition away from highly supportive monetary policy combined with a more restrained fiscal policy will impact the economy. The economy will continue to grow at a slower but healthy rate, inflation will trend downwards as supply chain snarls untangle and corporate earnings will continue to grow. In a rising interest rate environment I expect valuations of risk assets will come down. Speculative assets such as meme stocks, Ark Investments ETFs, and cryptocurrencies (not to be confused with blockchain technology), all struggled as 2021 came to a close. Textbook behavior for transitioning from easy to tight monetary and fiscal policy. Counterbalancing rising interest rates will be the fact that they will continue to be low, probably below both inflation and the rate of GDP/earnings growth, and so still supportive of equity prices. Overall I expect rotation from high valuation to low valuation assets rather than a dramatic repricing of risk assets overall. If you are wondering why I continue to have bond exposure in your portfolios given my outlook it's because I might be wrong!
I encourage you to read my short piece on investment behavior as we think about how to approach 2022. I continue to be humbled and honored that many of you entrust your hard earned savings to me for investment. I hope you are looking forward to 2022 as much as I am.
Sumit Kumar, Greenwich CT