By now your holiday tree is either quite crispy or has long been loaded in the mulcher. The candles have melted, the champagne has gone flat, and the last of the cookie crumbs and wrapping paper are in the dumpster. Another holiday season has come and gone; in and out, much like our waistlines! Yes, the five short weeks between Thanksgiving and New Years can take a toll on one’s figure and this year seemed worse than normal as everyone was ready for a party. After a year of little celebration, the holiday party circuit was back in full swing and the eggnog was flowing. Unfortunately, so was Omicron, the highly contagious COVID variant that appears to be the gift that keeps on giving!
Besides pounds on the scale, 2021 saw quite a few numbers go up and down starting with the number of COVID cases, vaccines received, and boosters approved. There were see-sawing gyrations in the stock market and global energy prices as the world tried to predict the impact of the Delta and Omicron variants on supply chains and consumer demand. There were the ups and downs of hyperbolic meme stocks, space rockets, bitcoin, natural disasters, flight cancellations, and the number of cargo boats unloading in California on any given day.
Then there was that one dreaded number that kept going up, inflation! Whether dining in or dining out, we’ve all seen an increase in the tab. (The November headline Consumer Price Index was up 6.8% year-over-year, the largest one-year gain since 1982). While some companies and businesses have been able to absorb input price increases, others have attempted to pass them on to the consumer. Additional “creative” types, have found an alternative solution called portion control. Did the quantity of tater tots on my plate just get cut in half? Did that 8-oz filet shrink to 6? No, that’s not your imagination and we’ve all seen this story before. Remember when Coca-Cola shrunk the 20-oz bottle to 16 ounces? Then a few years later we saw the introduction of the adorable 8-oz cans? Shrinkage is trending in everything from corn flakes to hamburger patties. However, for a country that outsources diabetes, perhaps we should take advantage of this inflation-induced diet program. After all, March and Spring Break are around the corner so you better get your beach body on!
In spite of price hikes and limited supplies, early holiday shopping reports show the consumer is quite healthy. Unfortunately, so are shoplifters who have wreaked havoc on the likes of retailers from Walgreen’s to Louis Vuitton. Perhaps inflated prices are just making up for the “spillage”. Stock market prices are also inflated; however, consumer sentiment is pointing in the other direction. Generally, happiness is correlated with the size of one’s pocketbook, but in a year that sent the S&P 500 up 28.7%, consumer sentiment fell by 13% as the cloud of COVID fatigue combined with rising prices weighed on consumer psychology.
Portion control is also showing up in employee populations. Whether due to illness, lack of desire, or shifts in long-term goals, it seems most places you go these days are understaffed. Our local CVS store recently shut its doors one day at 2:00 in the afternoon because no one showed up to work. The “Great Resignation” phenomenon is real, with 4.5 million people leaving their jobs in November alone. Meanwhile there are 11 million job openings still unfilled. This perfect storm has resulted in upward pressure on wages (year-over-year hourly earnings grew by 4.8% in November) as employers must dangle bonuses and enhanced benefits to entice people back to work. The NFIB Small Business Jobs Report found that 48% of businesses had job openings that they could not fill, more than double the 22% average over the report's 48-year history. Women have been especially affected as the shortage of child-care continues to be a major barrier to returning to the office.
Companies aren’t the only ones tightening their belts.; so is the government. Stimulus measures, which have made a significant contribution to the economic recovery, are dwindling. Stimulus checks have stopped, unemployment benefits have faded and bond purchases are ending over the next few months. President Biden's nearly $2 trillion Build Back Better plan waits in the wings, having stalled in the Senate at the end of the year. Child tax credits, which were received by more than 35 million families in 2021, stopped as of January 1 and remain a controversial part of this plan.
Chairman Powell is also restricting the Federal Reserve’s diet. Although December rates were left unchanged, the word “transitory” was retired and the Fed signaled they will be tapering bond purchases earlier than people expected. This sent the 10 year yield up to 1.52% to close the year, up from 0.93% at the same time in 2020. Further, rate hikes are all but assured in 2022 with the majority of members expecting a total of three.
Closing Thoughts
As we ring in 2022 and officially enter the 3rd year of a pandemic, perhaps the biggest “portion” reduction we have seen and the most significant unknown factor, is life expectancy. The United States alone has had two successive years of a decline in life expectancy of approximately 1.5 years each. Life insurance companies have reported the highest death benefits since the 1918 pandemic. We do not know what percentage of the labor force will have temporary, partial or permanent disability from Long COVID (and that’s just the US). Despite these uncertainties, we are all learning to live with this virus. More people are getting vaccinated and boosted, quarantine times are being shortened and kids are returning to school. There are sure to be more variants that evolve, just like the common cold. At Ulrich, we strive to maneuver and adjust our clients’ portfolios to persevere through good times and bad. Just like war, famine, and previous pandemics, this too shall pass. Until then, we continue to stay the course and focus on brighter days to come.
Regards,
John P. Ulrich, CFP®
President
Whitney E. Solcher, CFA®
Chief Investment Officer
Equity Markets
The S&P 500 Index was up a modest 0.6% in 3Q with results mixed across sectors. Industrials (-4.2%) and Materials (-3.5%) were at the bottom of the pack while Financials (+2.7%) were the best performers. Since the market low in February 2020, the S&P is up 97.3%. Growth stocks outperformed value (R1000 Growth: +1.2%; R1000 Value: -0.8%) but lag for the YTD period (+14.3% vs. +16.1%). Small cap stocks underperformed (R2000: -4.4% vs. R1000: +0.2%) and now lag YTD (12.4% vs. 15.2%).
The MSCI ACWI ex-USA Index lost 3.0% for the quarter, hurt primarily by U.S. dollar strength and the benchmark's exposure to emerging markets. The best-performing sector was Energy (+7%), while Consumer Discretionary (-11%) and Communication Services (-10%) posted steep declines. Note that these sectors include some of the Chinese stocks that have been hit hard by the country's regulatory crackdown (Alibaba, Tencent, and Baidu). The MSCI EAFE Index (Europe, Australia, and Far East) lost 0.4% but in local terms it was up 1.3%. Japan (+4.6%) performed relatively well while many of the larger constituents were down for the quarter. The MSCI Emerging Markets Index sank 8.1%, making it the worst-performing asset class for the quarter. Within emerging markets, Brazil (-20%), China (-18%), and Korea (-13%) fell sharply while India (+13%), Russia (+10%), and Colombia (+10%) were up strongly.
Fixed Income Markets
Yields in the U.S. were relatively unchanged from 6/30/21, masking intra-quarter volatility. The 10-year U.S. Treasury closed the quarter at 1.52%, up sharply from early August when it traded at 1.19%. TIPS outperformed nominal Treasuries for the quarter (Bloomberg US TIPS Index: +1.8%; Bloomberg US Treasury Index: +0.1%). The Bloomberg US Aggregate Bond Index returned 0.1% but remains down 1.6% YTD. Lower quality continued to outperform. The Bloomberg High Yield Index rose 0.9% and leveraged loans (S&P LSTA Lev Loan: +1.1%) also performed well. Municipals (Bloomberg Municipal Bond Index: -0.3%) underperformed Treasuries for the quarter.
Overseas developed market returns were similarly muted, and U.S. dollar strength eroded returns for unhedged U.S. investors. The Bloomberg Global Aggregate ex-US Bond Index fell 1.6% but was flat (+0.1%) on a hedged basis. Emerging market debt posted negative returns; the JPM EMBI Global Diversified Index fell 0.7% and the local JPM GBI-EM Global Diversified Index lost 3.1%, most of which was due to currency depreciation. In local terms, this Index was down only 0.2% for the quarter.
Real Assets
The Bloomberg Commodity Index rose 6.6% for the quarter and is up 29.1% YTD, but what lies under the hood is more interesting. Natural gas prices soared nearly 60% for the quarter, and those gains were relatively muted compared to the experience in Europe, where prices tripled over the quarter. WTI Crude Oil was up 4%. TIPS (Bloomberg TIPS Index: +1.8%) performed well relative to nominal U.S. Treasuries. Several other sectors were essentially flat for the quarter; the MSCI US REIT Index gained 1.0%; gold (S&P Gold Spot Price Index: -0.8%) and infrastructure (DJB Global Infrastructure: -0.9%) fell slightly. Copper fell more than 4% on worries over slowing demand from China.
The views expressed represent the opinion of Ulrich Investment Consultants. 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 sources that have not been independently verified for accuracy or completeness. While Ulrich Investment Consultants 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 Ulrich Investment Consultants’ 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.