Fourth Quarter 2021 Market Newsletter

Investment Management, Markets

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EXECUTIVE SUMMARY

US stocks and stocks of overseas developed markets rose in 2021 whereas high quality, interest rate sensitive bonds fell. Stocks of unprofitable technology companies fell sharply.

The discovery of Omicron, the latest strain of the Covid-19 virus has dampened economic activity. This strain is highly contagious but less virulent than previous strains. The possibility of a highly infectious and virulent strain being discovered is a risk factor to the economy and the stock market. Otherwise, the economy will grow next year and should support stock prices.

Inflation is the highest it has been in over 40 years. However, the components responsible for high inflation is expected to normalize in due course. Financial markets are projecting inflation to be a more manageable 3% or lower in the future.

The Federal Reserve is expected to raise interest rates in 2022 and this could impact stocks. Fiscal policy is expected to support stocks.

Corporate earnings grew by 70% in 2021 and were responsible for the strong performance of stocks. US stocks are expensive as compared to their historical valuation but are cheap in the light of historically low interest rates.

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