2021 In Review

Market Overview

Stocks were broadly positive in the fourth quarter with large cap US stocks roaring back after lagging small caps earlier this year. After a full year, we’re looking a very similar picture: stocks generally up across the board, with the largest US companies leading the way yet again.

During the fourth quarter markets seemed locked in an unending tug of war, from fears over the Omicron variant of COVID-19, to hope of massive federal stimulus, to disappointment over lack of said stimulus and on and on. As with markets long-term, it was two steps forward and one step back. International stocks and small caps spent the second half of the year in the doldrums, and bond prices and rates have been generally flat since rates rose earlier this year.

4Q 20211 Year3 Year5 Year
Large Cap US Stocks11.03%28.71%26.07%18.47%
Small Cap US Stocks2.14%14.82%20.02%12.02%
International Equity2.69%11.26%13.54%9.55%
EM Equity-1.31%-2.54%10.94%9.87%
Aggregate Bonds0.01%-1.54%4.79%3.57%

Index performance is provided as a benchmark. It is not illustrative of any particular investment. An investment cannot be made in an index. Past performance is not an indication of future of results. S&P 500, Russell 2000 Index, MSCI EAFE Index, MSCI EM Index, BBgBarc US Agg Bond Index. Returns as of 12/31/2021.

Economic Update

While markets whipsawed and Congress yanked us around, the major economic story in the fourth quarter was inflation. Price changes jumped dramatically for the first time in some investor’s lifetimes (!) and we saw 6.9% annualized changes in CPI in November, up from 6.2% in October. As we approached year-end, energy prices softened slightly after major increases earlier in the year.

There are going to be a lot of ongoing conversations and predictions about inflation, because we love to talk about anything new and shiny. But the fact of the matter is this: the Fed has been pushing on a string to try to get some sort of inflation to happen with no success. It took coming out of a global pandemic, a massive supply chain crisis and a labor shortage to make any material inflation come to pass. This is neither 1979 nor a Weimarian (can I do that?) hyperinflation environment. If you own equities and owe debt, you can’t be much better situated to manage inflation like we’re currently seeing.

Speaking of labor shortages, the most recent numbers showed the 4-week average of initial unemployment claims at their lowest levels since 1969. The labor market is very, very tight!

In said tight labor market, we are seeing ongoing upward pressure on wages as average hourly earnings grew 4.8% year over year through November, continuing the upward trend.

Supply chain issues post-pandemic are nowhere near over, as backlogs in nearly every consumer category remain. A fantastic example of this is vehicle sales – just ask anyone trying to buy a new car – they are nowhere to be found. Dealership prices are up, used care prices are up and overall sales are well below 2019 levels as supply simply cannot meet demand.

Finally, housing has been a major contributor to CPI increases. Residential real estate values continue to trend higher, boosted by millennial population purchases, historically low mortgage interest rates and severely limited marketplace supply. National home prices (Case/Shiller) are up 19.1% year over year and inventory levels are down 60.3% (!!!) from 2019 levels as we approach all-time low homes for sale.

Courtesy Calculated Risk/ Altos Research https://altosresearch.com/

Tax & Policy Updates

Remember three months ago when we were all fully confident that the Democratic-led stimulus bill and tax package was nearing passage? Well, that was fun while it lasted. At the midnight hour, the Build Back Better package died without much hope of anything like it passing soon. While many provisions (including several directly impacting tax and estate planning) had broad popular support in Congress, it is currently unclear if those items will resurface in the new year.

As things stand today, below is a quick summary of 2022 laws and limits going into the new year.

  • 401(k) contribution limits have gone up to $20,500, with the same $6,500 catch-up limit in place.
  • The federal income tax standard deduction for individuals is $12,950 and $25,900 for married couples filing jointly.
  • Social Security recipients will see a very large cost-of-living adjustment of $5.9% (although significant increases in Part B premiums will east into this).
  • The lifetime exemption for gift and estate taxes has grown to $12,060,000. Annual gift exemption will be $16,000, and increase of $1,000 over 2021.
  • Family HSA contribution limits get a small bump to $7,300 annually.

As of this writing (1/2/2022), the Backdoor Roth strategy survives for IRA conversions and in-plan “mega-backdoor” 401(k) conversions. Marginal income and capital gain tax rates also remain unchanged.

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