2021: A Year in Review
The past 12 months unfolded like the second act of a drama. The first act, 2020, introduced the greatest global health crisis in a hundred years and the world responded by essentially shutting down the global economy. In the U.S., we experienced the fastest economic recession ever, and a one-third decline in the S&P 500 in a mere 33 days.
Congress and the Federal Reserve responded nearly immediately with a wave of fiscal and monetary stimulus that are without historical precedent. We are now in the midst of a fiscal and monetary experiment, which renders all economic forecasting—and all investment policy based on such forecasts—hugely speculative. We at Charter Oak infer that if there were ever a time to just put our heads down and work our investment and financial plan—ignoring the noise—this is surely it.
If 2020 was the year of the virus, 2021 was the year of the vaccines. Vaccination as well as acquired natural immunity are increasing worldwide, regardless of how many more Greek-letter variants are discovered and trumpeted to the skies as the new apocalypse. This fact, it seems to us, is the key to a coherent view of 2022.
In general, we think it most likely that in the coming year: (a) the lethality of the virus continues to wane, (b) the world economy continues to reopen, (c) corporate earnings continue to advance, (d) the Federal Reserve begins draining excess liquidity from the banking system, with some resulting increase in interest rates, (e) inflation subsides somewhat, and (f ) barring some other external variable—which can never be ignored— equity values continue to advance, though at somewhat less than the blazing pace at which they’ve been soaring since the market March 2020’s market trough.
But please don’t mistake this for a forecast. These are simply the more likely outcomes based on what is known as we write today, and we are fully prepared to be wrong on any or all of the above points. Regardless of 2022’s outcome, our recommendations will be unaffected, because our investment policy is driven entirely by the plan we’ve made, and not at all by current events.
With that out of the way, allow us to offer a more personal observation. These have undoubtedly been two of the most shocking and terrifying years for investors since the Global Financial Crisis of 2008- 09—first the outbreak of the pandemic, next the bitterly partisan election, then the pandemic’s second major wave, and most recently a 40-year inflation spike. You might not be human if you haven’t experienced volatility fatigue at some point – we’ll admit to a bit of it too.
But like 2008-09, what came to matter most was not what the economy or the markets did, but what the investor herself/himself did. If the investor fled the equity market during either crisis—or, heaven forbid, both—her/his investment results seem unlikely ever to have recovered. If on the other hand she/he kept acting on a long-term investment and financial plan rather than reacting to current events, positive outcomes followed. It was ever thus. And we expect it always will be.
At Charter Oak we work with, and continuously coach our clients to be, long-term, goal-focused, plan-driven investors. We believe that the key to lifetime success in investing is to act continuously on a specific investment and financial plan. Likewise, we believe substandard returns and even investment failure inevitably occur when reacting to (let alone trying to anticipate) current economic/market events.
We’re convinced that the economy cannot be consistently forecast, nor the markets consistently timed. Therefore, we believe that the only reliable way to capture the full long-term return of equities is to ride out their frequent but historically always temporary declines.
Just in the last four decades or so, the average annual price decline from a peak to a trough in the S&P 500 exceeded 14%. One year in five, the decline has averaged at least twice that. And on two occasions (in 2000-02 and 2007-09), the Index has actually halved. Yet, the S&P 500 came into 1980 at 106 and went out of 2021 at 4,766. Over those 42 years, its average annual compound rate of total return (i.e., with dividends reinvested) was more than 12%.
The above underscores our conviction that the essential challenge to long-term successful investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines. These principles will continue to govern the essentially behavioral nature of our advice to you in the coming year ... and beyond.
We welcome your comments, questions and concerns, and we thank you for being our clients. It is a privilege to serve you and we wish you all the best in 2022.