By: Carter E. Anthony, CFA
In January, 2021, it would have been more than difficult to find anyone optimistic about the financial markets.
In fact, in mid-2021, even late 2021, it was difficult to find anyone excited about the stock market.
Facing a shaky new Democratic administration with spending dreams beyond comprehension, a continued black cloud over businesses, schools, households, et. al., from the Covid pandemic, a Fed decision-maker who was on-again, off-again, about slowing the money supply and raising interest rates, a Congressional silly debt ceiling, and growing inflationary worries, who was not concerned about the markets and their investments?
However, once again history proved accurate. When the Democrats are in office, the stock market does better than when the Republicans are in office.
It defies logic that the party that spends more and taxes more is favored by the financial markets. Investors apparently enjoy the flow of new cash more than they dislike the additional tax obligations, and they totally disregard the increased debt burden on the country and the economy.
In spite of all of the bad news that Washington and the media like to spout, third quarter earnings reports ushered in a fourth quarter that sputtered initially, gained traction and led the stock market indices to record highs again.
During the fourth quarter, the Omicron variant of Covid 19, more contagious but less deadly than the first two, became more prevalent, Congress blustered about raising the debt limit and rather than just talking Fed Chairman Powell set a tentative schedule for Fed Funds hikes.
Still, strong corporate earnings, the primary driver of stocks and markets prevailed over extraneous factors.
A couple of market affecting axioms to remember: (1) Don’t fight the Fed; and (2) The market climbs a wall of worry, i.e., a herd of investors buy on bad news.
For the fourth quarter and the full year, the major indices returned unexpectedly good returns, the S & P and Nasdaq returning 11%+ for the quarter and all 3 including the Dow returning 20%+ for the year.
Ten of the eleven S & P 500 sectors provided positive returns led by the Energy sector followed by the Tech sector.
With oil and gas futures rising, commodities had a good year. Gold, affected by the new cryptocurrencies, had a modestly negative return. Almost all fairly forgotten fixed income investments reported negative returns for 2021.
So where do we go from here? What has changed since January 1, 2021?
Twenty minutes of the nightly 30-minute newscast is still about Covid. The Fed has set a schedule for Fed Funds increases beginning in March.
Still, there is a lot of excess cash on the sidelines. Thankfully, the Democrat’s massive spending plans and tax increases have been derailed for the moment.
We are in a year of Mid-Term Elections in which the reigning party usually loses seats in Congress.
One market seer will tell you valuations are stretched but the next will tell you by some other benchmark valuations are favorable.
Byron Wien of Blackstone has predicted a 20% correction and recovery but a flat market for the year.
Jeffrey Gundlach, a bond guru, sees a recession looming as the Fed tries to stifle the highest inflation to hit the country in 39 years.
Others say after such a run in 2021, a correction is well overdue and they predict a 10-15% decline.
With all of this fear-mongering in mind, there is still no alternative. Money-markets barely pay 0.5%. The 10-year U.S. Treasury, a benchmark, yields 1.75%.
In comparison, Southern Company pays a dividend yield of 3.87% and raises its dividend annually. Verizon pays a dividend yield of more than 4.00%.
While it feels scary and treacherous at times, a well-diversified stock portfolio can be developed to earn a good 3%-4% dividend yield and grow annually from earnings to outpace inflation.
“Cash is trash! The benchmark U.S. Treasury 10-year note will pay you 1.75% each year for 10 years. I don’t know what the stock market will earn you over the next 10 years but history has taught us it will pay you substantially more than the alternatives.” (Warren Buffett, paraphrased)