Quarterly Commentary

You may have noticed that the market cycle has changed along with the Fed’s monetary policy shift to fight inflation. With inflation soaring, it is clear that the Fed is way behind the curve on raising interest rates. They will likely stomp on the proverbial breaks in an attempt to rapidly slow the overheated economy and inflation. When the Fed moves into this type of posture, they have caused a recession about three-quarters of the time. And recessions are typically correlated with bear markets.

After briefly touching record highs at the start of the year, markets gave investors a truly wild ride through the first quarter of 2022. Most indices chalked up their first quarterly loss in two years. Any positive sentiment that was carried into the new year got decimated by more sky-high inflation readings, clear indications that monetary policy must tighten faster than expected, and lingering concerns over additional COVID-19 variant surges. As if that wasn’t enough, Russia’s invasion of Ukraine brought a further surge in commodity prices along with huge spikes in market volatility as news and pictures of the horrors of a brutal war sent shockwaves around the globe.

Following increased volatility in the third quarter, the last quarter of 2021 brought an unnerving amount of optimism in the markets especially considering sky-high inflation readings, a hawkish Fed announcing moves to eliminate easy monetary policy from the past 10+ years, and concerns over the Omicron COVID-19 variant surge. Virtually all sectors ended the year strong during the fourth quarter of 2021 and benefitted from a December “Santa Claus rally” once again. The S&P 500 Index rose 10.65% during the fourth quarter to end the year up 26.89%. The tech-heavy NASDAQ closed out the year with an 8.28% gain for the quarter, almost all of which occurred in the month of October. In contrast to other indices, the NASDAQ squeezed out a mere 0.69% return in December. Furthermore, as we write this commentary, it is clear that was just the beginning of relative underperformance in the technology sector that would continue into the early weeks of 2022. The Dow Jones Industrial Average ended the fourth quarter up 7.37% and 18.73% for the entire year.

Inflation is a much more embedded problem than the Fed and politicians have been indicating. Shifts in the social system driving redistribution politics, the Fed’s easy monetary policy, and a pandemic have collided together to drive a very dangerous wave of wage and price inflation into the economic system. We have not seen this type of inflation set up since the 1970’s Stagflation crippled the U.S. economy.