Q4 Letter - 2021
We hope you all had a wonderful holiday season. It’s quite unfortunate that we are having to start the new year once again battling a resurgence of COVID. For those of you who are dealing with this first-hand, we wish you a speedy recovery and please let us know if we can be at all helpful. Omicron may have set our New Year’s resolutions back a couple of weeks, but don’t lose hope because we think 2022 is shaping up to be a good year for the markets.
2021 Inflation – Looking over the last year, inflation was the primary narrative driving the equity markets. The trillions in government stimulus, Federal Reserve’s liquidity hurricane, and COVID induced supply chain constraints created a trifecta of money driving inflation to levels unseen in decades. While it is unclear how long this inflation will persist, I do believe that we will look back on this period as a great inflation scare, rather than the start of a new inflation era. The federal government is no longer sending every household a thousand-dollar check, supply chains are coming back online with global container shipping costs down –20% since September and, most importantly, the Federal Reserve is turning off the money supply spigot. As famed Nobel Prize winning economist Milton Friedman once stated, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” While it may seem at the moment that prices may never stop rising, we must keep in mind that these relationships often take time to realize, and according to Friedman always do. Given the pace at which the Federal Reserve plans to tighten this year, we believe that the market’s obsession with inflation could take a back seat in 2022.
2022 Positioning for a Tighter Fed - Although the Federal Reserve’s plan to tighten monetary policy may at first scare investors, it is important to remember that historical periods of Fed rate hikes have actually been correlated with positive equity market returns. Initial announcements tend to spook markets into temporary corrections, but the improving economic conditions, which give the Fed confidence to even consider raising rates, typically reemerge as the prevailing narrative, as was the case in 2018-2019. What gives us further confidence is the positive earnings outlook going into 2022, as well as the shape of the yield curve which indicates the economy is able to withstand slightly higher interest rates. At the index level, we believe this setup should result in a bumpy but upward trajectory for equities in 2022, with pockets of volatility and opportunity surrounding Fed announcements. Under the surface though, the Fed's actions will likely affect different equity factors in different ways depending on the duration of this new economic cycle. We believe a longer cycle could present a serious headwind for valuations (think growth stocks), as the combination of elevated growth and inflation would favor value and small cap factors along with a higher 10Yr treasury yield. On the other hand, a shorter cycle would imply an expedited flattening of the yield curve which means stronger headwinds on cash (think value and high yield) and relatively less on valuations. In our flagship strategy, MLS, we continue to take a stable approach and have recently added a few more value-oriented holdings to help balance the portfolio.
It is difficult to predict how fast this economic cycle will progress, but what is worth considering is the speed at which we are moving through the interest rate cycle. After the dot-com bubble the Fed cut rates in 2000 and didn’t raise them again until mid-2004, and after the Financial Crisis interest rates were cut in 2007 and held near the zero bound until 2016. This time around the Fed first cut interest rates in July 2019 and economists are already projecting for the 1st rate hike to be announced in March with 2-3 more following through the year. Even more notable, forward prices on treasury notes are now projecting that the Fed will start cutting interest rates as early as 2024. Investors may need be prepared for a market that can move rather quickly over the following years.
Despite the rocky start, we are looking forward to this new year and the opportunities emerging. As always, we appreciate the trust you’ve placed in us to manage your capital. If you have any questions, feel free to reach out.
Information presented reflects the personal opinions, viewpoints and analyses of the employees of Mirador Capital Partners, LP, an SEC-registered Investment Adviser. The views reflected in the commentary are subject to change at any time without notice. Nothing herein constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Mirador Capital Partners, LP manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Visit us at miradorcp.com for more information.