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Future generations are now footing the bill, not only for today’s entitlement recipients, but for record corporate profits as well! (Consider a gift of QQQ shares to help them pay for it all.)

The current mania won’t last forever. But our use of the “New Era” label in describing the last-quarter century or so of stock-market dynamics is still useful—in part because it highlights fundamental developments that simply cannot be repeated indefinitely. 

The impact of Omicron is already fading and the global-tightening cycle is far more important going forward. Elevated valuations amid a broadening global-tightening cycle is our key concern.

If January is the 21st month of the recovery, then time has elapsed in “dog years.” And that might put this “canine” recovery at around 12 years—just shy of where we might be had COVID never occurred! 

Market revelations were certainly not in short supply in 2021. We believe some of those surprises will continue to have a huge impact on markets in 2022. We have updated our time-cycle composites to provide an idea of what a “typical” 2022 could look like.

Speaking ill of the NASDAQ is like taunting Tom Brady; it’s hard to remember a good outcome. Still, we must dutifully report a new finding that QQQ owners won’t like.

You’ve likely heard of “shrinkflation,” the practice in which a package of M&M’s is reduced from 40 pieces to 32, while the price per bag is unchanged. Publicly-traded companies have been engaged in similar schemes for awhile.

Mask mandates are back in vogue, and it’s investors who should be the first to welcome them: They’ll protect us from January’s blast of “thermal pollution,” when Wall Street prognosticators expel large volumes of hot air with prophesies for the new year. We have no problem with the exercise—so long as full-year forecasts (including one’s own) aren’t taken too seriously. “Forecasts are for show,” Steve Leuthold would always say.

Financials, Information Technology, and Energy continue to round out the top of our sector scores. Communication Services advanced from 10th to 7th. Real Estate made the largest drop as it moved from the 6th ranking to the worst-rated sector at 11th. Holding steady in the 4th and 8th spots are Health Care and Consumer Discretionary, respectively. Joining Real Estate among the bottom-three ranks are Industrials and Utilities.

We take a look at our historical analysis of industry-group portfolios to see how the “Dreams” and “Nightmares” from 2020 fared in 2021. The industry composition of the 2021 Dream and Nightmare portfolios is also presented.

With the 2020 Bridesmaid Asset Class (Small Caps) and Bridesmaid Sector (Consumer Discretionary) underperforming in 2021, the Cheapest Sector results in 2021 salvaged a bit of pride for the author of this annual evaluation. Even better, owners of the Financials sector won’t need to send the government its share of their long-term capital gains, since they’ll be holding it for another twelve months.

For our more fundamentally-oriented readers who are repulsed by all this talk of momentum, we have an alternative. Just forget about performance and focus solely on value!

As noted, the Bridesmaid sector strategy has underperformed what has become a more difficult benchmark in five of the last six years. Those poor results have cut the annualized excess return of this approach to just +2.1% since 1991. 

Once again, the idea is to dispense with macroeconomic trends, sector fundamentals, comparative valuations, and to base sector selection solely on the prior year’s total returns.

Overall, five of the seven assets available for the Bridesmaid strategy have underperformed the S&P 500 over the long-term, and three (Treasury Bonds, Gold, and Commodities) lagged by 390 basis points or more per year.

The “risk-adjusted returns” concept faded further into obscurity in 2021, with the year’s largest drawdown in the S&P 500 a mere -5.2%. But for those who still care about risk, the Bridesmaid strategy—though it often holds highly-volatile stuff like Gold, Commodities, and Small Caps—has been only about 1% more volatile than the S&P 500.

For those not blessed with clairvoyance, we’ve developed an asset selection strategy that’s done very well, historically, compared to the “naïve” AANA Portfolio and even against the almighty S&P 500. We’re not implying that investors dump their valuation models, economic forecasts, or their intuition. But they should recognize that price momentum tends to persist—not just among stocks and industry groups—but at the asset-class level as well.

Remember, the All Asset No Authority Portfolio assumes complete naïveté on the part of the portfolio manager. That’s one extreme of the asset allocation continuum—although few allocators would admit that such an approach might be viable, despite its respectable history.

Boy, we thought policymakers had thrown the kitchen sink at the economy in 2020. Evidently, the Fed’s Marriner Eccles building has two kitchens, because they were able to do it again in 2021: M2 grew 13%, the Fed’s balance sheet swelled19%, and the 2021 federal deficit will come in at 12% of GDP.

Despite elevated uncertainty over pandemic developments and expected policy tightening, and in the face of aggressive valuations, the S&P 500 still managed to gain a delightful +28.7% in 2021. Even more noteworthy, in our opinion, is that this advance came with nary a single correction of more than 10%.