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WIA BELIEVES | Bumpy Beginning to a New Year

| January 11, 2022

Stocks surged out of the gate on Monday, January 3, with the Dow Jones Industrial Average and the S&P 500 hitting records to ring in the first trading day of the new year. Then came the midweek release of the Federal Reserve’s minutes from its December meeting, halting the ticker tape in its tracks. The prospect of higher rates hit growth stocks the hardest—the tech-heavy NASDAQ composite index was down more than 8% from its November high at Friday’s close.

The tug-of-war between strong earnings and inflation represents an economy that continues to strengthen even as markets face a bumpier ride. Our plan is to remain disciplined, to look at the big picture, and to make sure portfolio allocations align with individual objectives and tolerance for risk.

Supply Chains Finally Begin to Unkink, but “Help Wanted” Signs Remain

While headlines scream of inflation concerns, there are signs that supply chains may be starting to unkink providing some easing in pricing. A survey of manufacturers shows a slow return to normal is in the offing. Respondents indicated that delivery times had decreased, hiring had picked up and prices manufacturers paid for things like raw materials had declined—all signs of supply chain progress.

Offsetting this supply-of-goods relief however is the matter of a constrained labor supply and commensurately higher wages. The Great Resignation is real, yet the unemployment rate is near all-time lows and labor participation rates are oddly continuing to be high.  Time will tell if wage adjustments, improving employee benefits and remote work flexibilities will provide the right mix to get this “ghost” labor force back to work. In sum, inflation has returned above the friendly, unprecedently low levels of the past ten years. We believe this normalizing process will continue, including rising interest rates, however not at levels to be traumatizing to consumer spending or corporate investment.

Rate Rise Could Tweak Tech

A newly aggressive Fed could yield a very different stock market in 2022 compared to 2021. As noted above, a more hawkish Federal Reserve spurred a bout of selling last week as traders repriced stocks, particularly tech stocks. Prices of future-tech “Innovative” companies, an asset class that we fundamentally have a strong long-term belief in, have been battered over the past month - patience will be both required and rewarded here.  As we’ve pointed out, last year’s strong gains in the major indexes were driven by a handful of stocks—mainly tech (or tech-adjacent) giants with sky-high valuations that were predicated on those firms being the best bet for robust growth in a low-interest-rate environment. It’s too early to say whether this bad week for growth stocks means that another turn toward value is in the cards for 2022. But it does seem increasingly likely that this year’s winners (and losers) may be quite different from last year’s.

What Will the S&P 500 Do in 2022?

The S&P 500 index had a strong 2021, capping a third consecutive year of double-digit gains, and surpassing historic expectations for this usually more volatile asset class. Will it continue? It’s too soon to tell. But as we saw this week, the market does its best to constantly confound the greatest number of people.

At Webster Investment Advisors we prefer to skip the fortune-telling and focus instead on fundamentals like global demographics, economic trends and corporate financials. Earnings and interest rates are what drive stock prices for quality companies. As the economy continues to rebound from pandemic shutdowns (It Is) and supply chain snags get resolved (They Are), the earnings outlook for the first quarter remains robust and should support stock prices. And despite the hikes coming from the Fed, interest rates are still historically low. As long as cash and bonds offer low yields, stocks will remain relatively attractive.

Last year was difficult for active managers who owned stocks other than mega-cap market darlings. A lot of the market’s performance was captured in those few names. But we don’t think the concentration will continue to the same extent in 2022. A myriad of factors, such as interest-rate changes and a recovering global economy, should offer greater investment opportunities at discounted prices—and provide asset classes beyond large-cap growth with the chance to outperform.

Also, inherent to the S&P 500 question is another question: Whether it still pays to invest in a diversified portfolio that can include foreign stocks, bonds, real estate, and alternatives? We think so based on our experience, and for the numerous risk-management/return opportunity reasons we regularly discuss in our communications. We know that whether sentiment shifts away from a focus on the S&P 500 in 2022 or 2023, it will happen eventually. When it does, your portfolio will be positioned to better weather volatility and benefit from new areas providing return potential. James and I look forward to sharing 2022 with you as this journey unfolds.