The 4th quarter provided a nice recovery for the markets after some setbacks in the 3rd quarter. And the full year for 2021 was another solid year overall for investors in the stock market. As has become habit since the financial crisis of 2008-09, international stocks continued to underperform their U.S. counterparts. Bond markets were down, which merely demonstrates diversification in action.
It’s important to note that market returns have been positive in recent memory, but that won’t always be the case. Every long-term investor should prepare for inevitable market corrections. My crystal ball remains foggy, so I can’t tell you when the next correction will happen. Setting appropriate expectations for future returns and keeping a focus on the long-term are essential.
Economic growth
With the latest incursion from Omicron, we continue to grind through the COVID-19 pandemic. The economic recovery is expected to continue in 2022, but challenges remain. High consumer demand has run straight into a wall of nagging supply chain issues. Inflation has ticked up and labor markets are in flux. Let’s look at some key data points.
U.S. per capita GDP has crawled out of the crater left in the wake of the COVID-19 disruptions.
The rise in housing prices is supporting construction of new homes. Housing starts remain steady around 1.6 million units (compared to the pre-pandemic average of 1.2 million).
The unemployment rate has fallen to 4.2% with the November reading. Employers continue to work hard to find workers, especially in retail and service industries such as restaurants and hotels. Many folks are quitting their jobs, but it remains to be seen how long this holds true.
Inflation and interest rates
Elevated inflation has drawn significant attention from market observers. The latest headline reading came in at 6.8%, while correcting for food and energy dropped it to 4.9%. Contributing factors include:
increased fiscal support from the federal government
high consumer demand
supply chain bottlenecks
low interest rates
Short-term interest rates remain stuck at zero or using some measurements, well below zero. The Wu-Xia Shadow Federal Funds Rate (shown below) is an indicator of the “effective” Fed Funds rate after accounting for the effects of Quantitative Easing (QE) and other market support actions from the Federal Reserve. Based on this measure, short-term U.S. interest rates are around negative 1.85%.
The Federal Reserve has indicated more willingness to fight inflation in the near term. The latest Fed “dot plot” indicates that Fed officials expect to raise rates three times in 2022 and another three times in 2023. Combined with a more aggressive tapering of QE efforts, effective short-term interest rates should begin to normalize over the next few years. The challenge for the Fed will be to balance the need to manage inflation while still supporting the market and economic growth. Rising interest rates could pose a significant obstacle for markets over the next few years.
Federal Reserve “Dot Plot” from Summary of Economic Projections December 15, 2021
Retirement policy updates
There is some optimism that Congress could pass a modest update to retirement law in 2022. Dubbed the Securing a Strong Retirement Act of 2021, this bill would make the following changes:
Expand automatic enrollment of workers in qualified retirement plans and enable automatic increases in employee contribution amounts.
Raise the age when retirees must take required minimum distributions (RMDs) from the current age of 72 to 73. And follow on increases to age 74 in 2029 and age 75 in 2032.
Reduce the penalty for failing to take an RMD from 50% to 25%.
Increase the limits on “catch up” qualified retirement plan contributions for workers ages 62 – 64 to $10,000 (indexed for inflation).
Index the “catch up” contribution limit for IRAs to inflation.
Allow employers to use an employee’s student loan payments as the basis for matching contributions to the employee’s qualified retirement plan account.
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Market Commentary 4Q 2021
The 4th quarter provided a nice recovery for the markets after some setbacks in the 3rd quarter. And the full year for 2021 was another solid year overall for investors in the stock market. As has become habit since the financial crisis of 2008-09, international stocks continued to underperform their U.S. counterparts. Bond markets were down, which merely demonstrates diversification in action.
It’s important to note that market returns have been positive in recent memory, but that won’t always be the case. Every long-term investor should prepare for inevitable market corrections. My crystal ball remains foggy, so I can’t tell you when the next correction will happen. Setting appropriate expectations for future returns and keeping a focus on the long-term are essential.
Economic growth
With the latest incursion from Omicron, we continue to grind through the COVID-19 pandemic. The economic recovery is expected to continue in 2022, but challenges remain. High consumer demand has run straight into a wall of nagging supply chain issues. Inflation has ticked up and labor markets are in flux. Let’s look at some key data points.
U.S. per capita GDP has crawled out of the crater left in the wake of the COVID-19 disruptions.
The rise in housing prices is supporting construction of new homes. Housing starts remain steady around 1.6 million units (compared to the pre-pandemic average of 1.2 million).
The unemployment rate has fallen to 4.2% with the November reading. Employers continue to work hard to find workers, especially in retail and service industries such as restaurants and hotels. Many folks are quitting their jobs, but it remains to be seen how long this holds true.
Inflation and interest rates
Elevated inflation has drawn significant attention from market observers. The latest headline reading came in at 6.8%, while correcting for food and energy dropped it to 4.9%. Contributing factors include:
Short-term interest rates remain stuck at zero or using some measurements, well below zero. The Wu-Xia Shadow Federal Funds Rate (shown below) is an indicator of the “effective” Fed Funds rate after accounting for the effects of Quantitative Easing (QE) and other market support actions from the Federal Reserve. Based on this measure, short-term U.S. interest rates are around negative 1.85%.
The Federal Reserve has indicated more willingness to fight inflation in the near term. The latest Fed “dot plot” indicates that Fed officials expect to raise rates three times in 2022 and another three times in 2023. Combined with a more aggressive tapering of QE efforts, effective short-term interest rates should begin to normalize over the next few years. The challenge for the Fed will be to balance the need to manage inflation while still supporting the market and economic growth. Rising interest rates could pose a significant obstacle for markets over the next few years.
Retirement policy updates
There is some optimism that Congress could pass a modest update to retirement law in 2022. Dubbed the Securing a Strong Retirement Act of 2021, this bill would make the following changes:
Matthew P. Jenkins, CFA, CFP®
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Matthew is a CFA® Charterholder and CERTIFIED FINANCIAL PLANNER™ Professional. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and the Fee Only Network.