• In 2021, the S&P500 had a total return of 28.7%, which is the seventh highest gain in the past half-century. As 2021 was its third consecutive year of double digit returns, many analysts believe the stock market is due for a correction. However, history shows that the good times can continue. The S&P500 returned more than 21% every single year from 1995-1999, before finally crashing and losing nearly 50% of its value in 2000.
• The common narrative over the past few years has been that there-is-no-alternative to stocks. However, that is starting to change. The 10-year treasury yield rose as high as 1.8% last week, causing the Nasdaq 100 to drop 4.5%. This makes sense because at the start of 2021 83 companies within the Nasdaq 100 had a higher corporate profit payout that the 10-year treasury…today that number has dropped to only 64 companies.
• Typically commodities perform well when inflation is as high as it currently is. However, China may create problems for investors that pile into commodities such as metals. At present, the Chinese economy is slowing down significantly and is only expected to grow by around 5% in 2022. As China is responsible for 55% of global metal demand, this could pose a threat to global commodity prices. The Chinese property market alone accounts for 30% of global copper demand.
• Although every investor is paying close attention to the Federal Reserve’s interest rate policy, fewer are focused on its balance sheet. This may be a mistake since the Fed now owns roughly one third of the entire treasury and mortgage markets. As a result, long-term rates will start to rise as the Fed starts reducing its balance sheet. The removal of the Fed’s massive bond buying program will leave the market to price bonds more accurately.