Happy New Year!!
2021, a very challenging year! It turned out to be a good year for investors. Thinking back over the year, it seems a bit out of focus. The words that come to mind are, Pandemic, Spike, Vaccination, Acceleration, and Inflation.
The year began with the Pandemic still directing our consciousness. A Spike at the end of the year due to holiday mingling brought back many uncertainties. Then the Vaccines gave hope that there might be an end in sight. The economy Accelerated with a roar as the vaccines were distributed and administered. The flame of Inflation was fanned as consumers were flush with cash from multiple stimulus efforts from Washington. Then hope faded as more variants were discovered.
Wow! There were so many emotions. Very challenging for investors.
At Vista, we would prefer smoother waters to sail. That would be more comfortable. It is just not the usual circumstance. The water is usually choppy, sometimes churning. We accept the challenge.
In 2021 Vista was committed to our mission, to provide world class asset management and personalized financial planning to our clients. Driven by our primary value, Doing What’s Right (DWR), we navigated the year’s turbulence. Thanks to our Vista Partners, and employees, we needed every one of you. We appreciate you. Thanks to our clients, we would not be here without you!
New Year, same mission. This is the year we were supposed to get our lives back from the Virus. Just not yet…
Perspectives is meant to be a look into the economic picture from my view as Senior Portfolio Manager/Managing Partner of Vista Investment Partners. The bulk of the time, Perspectives is forward looking. What is coming next for the economy, and the market. This task is often challenging. It is rare that we get it all of it right, though we usually get a big part of the picture to come out somewhat in focus.
A pause to look back is timely as well. Last year, we were fortunate enough to outperform the S&P 500 with both of our equity strategies. This is a lofty accomplishment, and I could not be prouder of our team at Vista. Thanks to Kimberly, CJ and Olivia for making the entire team look good. It would not be possible without you. Thanks to my Partners Brett and Sarah, who helps me keep our mission in focus. That mission is to provide World Class asset management to our clients.
“Where do the fish go?” asked my partner. “They go to the deep runs and slow down”, I replied.
“Do they still eat?” “Yes, there are still bugs in the ecosystem”, I replied.
Winter fishing may be good at times. It is just not my thing. I prefer the long summer days. Long sunny days of the Snake River suit me. I guess I am one of the boys of summer.
How does this relate to investing in the market? Is it summer, or winter for the market?
My view is that it is likely late spring for the market. We are 19 months from the market low in March of 2020. The average Bull market lasts from just under 4 years, to 8+ years, depending on definition and who you ask. The economy is 17 months post 2020 Pandemic recession. The last economic expansion lasted 11 years. That was the longest in history, though it was also the weakest expansion in history. I am not suggesting this expansion will be anywhere near that duration, we just don’t know yet.
The economy is important. The market loosely follows the economy. It is one the Leading economic indicators. Evidence, the market turned down before the pandemic hit the US. The then market rallied before the economy recovered. The economy is healthy at this stage in the expansion. The Federal Reserve is just winding down the stimulus in March. The Federal Reserve is the main monitor of the US economy. There two main mandates, full employment, and to keep inflation intact.
Inflation? More news than long term threat. My view is that inflation will recede during the 2nd and 3rd quarter of 2022.
Earnings. I believe the very strong earnings picture is going to decelerate as well. The growth is unsustainable. Decelerate, does not mean recession, just a natural slowing of the growth.
The VIP 2022 S&P 500 EPS estimate is $225. I believe the market will trade at a similar PE to last year, so 5075 is our target for the end of the year. That is about a 7.7 % return from today’s close. This year will be much more tactical in my opinion. 2021 was not very tactical, as most of the pullback were 5-6% or less. We will use weakness to add to risk. We will use strength to pare back risk.
Historically, the year following a strong year like 2021 are positive. The water is just now beginning to get warm enough for the fish to become active. Let’s go fishin’, but remember it is a long summer. The economy, and thus the market has some time to warm up.