We at Granite Group like to take a look at what to expect in the economy and markets. Our clients receive commentary like this on a regular basis. Below we review how 2021 ended, as well as what we thought we might expect in the first quarter of 2022 as of December 31, 2021*.
Looking Back at Q4 2021
The fourth quarter was volatile in the equities market, as predicted, but overall it was a positive quarter.
Fear of Omicron as well as inflationary pressures caused the most fluctuations. Growth outperformed value in the large cap space, but the mid and small cap value play was the big winner in equities for the year.
International rebounded a bit, but China’s fall produced a negative return in emerging markets.
Fixed income was mostly flat for the fourth quarter of 2021, but ended the year with a negative return.
Absolute Return Hedge Fund of Funds
Hedge funds held their own and outperformed fixed income by a large margin in the quarter and the year.
Real estate performance continues to do well as housing is still in short supply, especially in states like Texas and Florida. The continued movement in this area with the backdrop of Covid is still in play. Cheap borrowing continued all year, which doesn’t hurt this sector, making it somewhat inflationary.
Q4 2021 was a decent quarter, but fossil fuels were definitely the most consistent performers. Supply chain problems helped push commodity prices higher and there seems to be no clear end in sight on that front.
Thoughts on the Markets in the First Quarter of 2022
Equity markets have risen dramatically over the last several years, to the point where valuations are rich.
With interest rates expected to rise, telegraphed by the Federal Reserve, the end of cheap money will go by the wayside. However, we do not expect borrowing costs to go up high enough to derail equity investments.
We believe that 2022 returns will be muted with positive returns in the equity markets. We still have supply issues and sticky cost-push inflation in the economy, but that should moderate.
Inflation will definitely take a bite out of growth, and without stimuli from the federal government, that translates to the U.S. economy slowing down a bit in 2022.
Non-U.S. markets seem poised to do better than the United States in 2022, but we expect that to take time, occurring over the course of the year rather than an immediate move.
Fixed Income Markets
The bond market continues to be difficult to navigate, as interest rates are low and have nowhere else to go but up.Inflation and rates are expected to rise, but we have not seen much movement considering the economic backdrop.
We are sticking with the point of view that bonds will not offer much in terms of returns over the next few years, but will still be used as a safety net against equity bets.
Commercial & Residential Real Estate
Real estate continues to do well as movement from the bigger population centers keeps up, although it has slowed.
Interestingly enough, we are now seeing further opportunities because of the return to the big cities. The point being: real estate will do well, especially due to the lack of supply.
On the office space front, we should see people coming back to the office, but due to the proliferation of technology and cultural changes, we expect much lower returns in the future.
Absolute Return Hedge Fund of Funds
We reiterate our call from last quarter that absolute return funds will continue to be a good place to park money designated for fixed income due to the current interest rate cycle.
The performance in 2021 was exactly what you would expect: better returns than fixed income and a lot lower volatility than equities. This is expected to continue for a while.
Commodities might get the break it has been looking for in 2022, that being the weaker dollar. If that becomes a reality and you combine lack of supply side inflationary pressures, it could be a very good year for commodities!
There are always external events that affect the markets. But this is what we are seeing in the markets as of today.
At GGA Retirement, we offer employees in our 401K plans a customized personal allocation and automatically rebalanced portfolios. We’re here to help employees, employers and advisors. Give us a call at (203) 210-7814 if you have questions about the issues raised in this blog.
*Disclaimer: The views expressed by Granite Group Advisors, LLC through the end of every quarter are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. This is not intended as investment advice, please contact your personal investment advisor before taking any action.