Review & Outlook
January 12, 2022
As we reflect on the events of 2021, it’s hard to not be astonished with the pace of equity market gains. Carderock’s Quality Growth strategy remained in favor, with the average Carderock Client Stock Portfolio1 gaining 28.99% versus 28.71% for the S&P 500 on a one-year basis, and a five-year total return of 181% for Carderock Stocks versus 133% for the S&P 500.
And while we celebrate another great year, we recognize the path was not always smooth. Investors rotated toward more cyclical sectors (Energy, Homebuilders, and Financials) in 2021 as commodity inflation and residential home price appreciation dominated the headlines.
Our View for 2022
The Economy
- Inflation subsides as seasonality in transportation and home buying takes hold and services rebalance against over-heated demand for goods. The worst is likely behind us.
- Economic Growth decelerates but stays robust relative to pre-Pandemic trends.
- Profit Margins weather a temporary squeeze due to Labor and resource constraints but stay near record highs.
- Capital Investment – both public and corporate, restarts as part of a long-term effort to strengthen productivity, but its ultimate payoff will face interim risks by our decision-makers.
- The Federal Reserve has fully committed to “regime change” and will attempt to cool overheated Demand without killing it. This might be the second time in 100 years they succeed, as Houdini faced tougher challenges.
Stocks
- Quality Growth Stocks should continue to see earnings and price growth, albeit at a slower pace compared to the astonishing gains of the last few years.
- Value, Small Cap and Foreign Stocks offer tempting prices on relative basis, but we believe over the course of a cycle our Quality Growth strategy will achieve better risk-adjusted returns.
- Price Corrections have become more commonplace in individual stocks but have been masked by growth in aggregate indices. We may see an aggregate correction in 2022.
- Equity Rotation toward slower growth sectors of the economy that have been neglected since the onset of the Covid-19 pandemic is expected.
Fixed Income
- Interest Rates should rise as markets adjust to the Federal Reserve’s announced policy change, with higher-than-expected issuance outpacing demand.
- Buyer’s Remorse and Overreaction will present selective opportunities in fixed income, but as a rule fixed income markets continue to serve principally as a store of value as stock market volatility rises.
- Higher Taxes appear unlikely, but municipal markets nevertheless have priced in a substantial increase that severely limits their current appeal – particularly for MD and VA paper.
Bottom Line
Stocks should run with higher volatility and cooler (but positive) returns, while Bond prices will continue to face challenges from both low supply and higher rates.
No doubt, the Omicron variant will continue to disrupt local economies across the globe, but we see diminishing consequences, and remain sanguine that the end is in sight. In summary, we are optimistic for another great year and see shades of “normalization” all around us, both in financial markets and our daily lives.
As always, feel free to give us a call to review your investment progress or ask any questions you may have.
Warmest Regards,
Carderock Capital Management Investment Committee
James W. Mersereau, CFA
President
Daniel A. Kane, CFA
Managing Director
Stephen F. Knapp, CFA
Director of Research and Quantitative Strategies
