Market Overview

Financial media personalities are really good at explaining the past with pinpoint accuracy, and failing miserably at predicting the future. I did some research and found once again big bank market predictions missed the mark in 2021. This is nothing unusual.

Here were the year end S&P 500 forecasts from the big banks at the start of 2021:

JP Morgan Chase - 4,400

Goldman Sachs - 4,300

UBS - 4,100

Credit Suisse - 4,050

Barclays - 4,000

Deutsche - 3,950

Morgan Stanley - 3,900

Wells Fargo - 3,850

SocGen 3,800

Citi - 3,800

BofA - 3,800

The S&P 500 closed 2021 at 4,766. 

Big banks, nor anyone else, possesses market forecasting skill. In that spirit, let me tell you more about 2021 and give you little to no insight as to what lies ahead for 2022.

It was a wild year in many respects, but the stock market turned in a solid performance in 2021. Time and again, investors brushed off news that could’ve derailed stocks.. A contested presidential election, an assault on the Capitol, historically high inflation, supply chain disruptions, naysayers who forecasted a correction that never appeared—none of these events stopped stocks from notching all-time highs. Not even the still-raging global Covid-19 pandemic, or its Delta and Omicron variants.

Other themes which dominated 2021, you may have heard a lot talked about the so-called ‘rotation’ from quality stocks to so-called value stocks, which in many cases is simply taken as equating to lowly rated companies. Somewhat related to this there was periodic excitement over so-called reopening stocks which could be expected to benefit as and when we emerge from the pandemic — airlines and the hospitality industry, for example. There are multiple problems with an approach which involves pursuing an investment in these stocks. Timing is obviously an issue. Another is that their share prices may already over anticipate the benefits of the so-called reopening. As Jim Chanos, the renowned short seller, observed:

“The worst thing that can happen to reopening stocks is that we reopen.”

It is often better to travel hopefully than to arrive.

No matter how many times it’s proven otherwise, some still hold out hope that a special someone can predict the future. At any given moment there are probably thousands of people predicting a market crash. When(not if) the market crashes again one day , someone will have luckily timed their dire forecast well and be called the next Warren Buffett. But as few fail to realize:

“Buffett’s secret is that he’s been a good investor for 80 years. His secret is time. Most investing secrets are.”

Just remember, bears make money so infrequently in financial markets that when they do there are movies made about it The Big Short (one of my favorites).

I would like to leave you with this thought: The Market has prospered during the pandemic. The companies it is composed of have endured much more — the Great Depression, World War II, the Great Inflation of 1965–82, the Dotcom meltdown and the Credit Crisis. They will probably survive whatever comes next and so will we if we stick to our principles and I have every intention of doing so. 

Economic Update

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 (I drove with my dad to Indiana to find an available SUV he wanted) – they are nowhere to be found. Dealership prices are up, used car prices are up and overall sales are well below 2019 levels as supply simply cannot meet demand.

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% year over year and inventory levels are down 61%  from 2019 levels as we approach all-time low homes for sale.

While markets whipsawed and Congress yanked us around, the major economic story in the fourth quarter was inflation. There are going to be a lot of ongoing conversations and predictions about inflation, because we love to talk about anything new and shiny. 

It is not difficult to see potential causes of inflation. The expansion of central bank balance sheets with Quantitative Easing after the Credit Crisis has been followed by huge monetary and fiscal stimuli put in place to counter the economic effects of the pandemic. One might reason that given the growth in the money supply has vastly outstripped the increases in production of goods and services the price of those goods and services was sure to be bid up and ipso facto inflation must follow. 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. 

However, this omits another important element of the equation — the velocity of circulation of money. Are people more inclined to save the additional money or to spend it? The savings ratio leapt after the Credit Crisis and again during the pandemic partly no doubt due to caution but also because there were fewer opportunities to spend, for example on travel and vacations. However, it is now on its way back to pre-crisis levels so maybe we have all the ingredients for inflation to take hold. You might well be confused at this point (I know I am) particularly considering that the “authorities” spent most of the decade post the Credit Crisis trying to generate inflation in order to negate the deflationary effects of the Credit Crisis and its causes. The trouble is that with inflation, as with so much else, you need to be careful what you wish for. It is a bit like trying to light a bonfire or a charcoal grill. If you put an accelerant like gasoline on it you can go from no fire to a loud ‘Whoosh!’ and find that you have also set fire to the fence, shed, the flower garden and melted some of your siding on your home.

The good news is that we do not invest on the basis of our ability to forecast inflation or any other macroeconomic factor. 

Tax & Policy Updates

Remember three months ago when I was fully confident that the Democratic-led stimulus bill and tax package was nearing passage and the Backdoor Roth would die? 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.

Financial Planning for 2022 and Ahead

No major tax changes occurred in 2021 like we may have suspected. I think it’s often prudent to wait and see what legislation passes before making drastic financial planning decisions. Here are a few bullet points for 2022.

• The Enhanced Child Tax Credit has expired and will return to the normal credit of $2,000, subject to phase outs.

• No changes have been enacted for Backdoor Roth IRAs or Mega Backdoor Roth IRAs.

• Social Security’s cost of living adjustment was 5.9%. 

• But Medicare’s Part B premium has increased to about $170 per month.

• For those under age 50, you can defer $20,500 for employee 401k contributions in 2022 and $27,000 if over 50.

• A SEP IRA owner can defer a maximum of $61,000 for 2022.

• The federal income tax standard deduction for individuals is $12,950 and $25,900 for married couples filing jointly.

• Family HSA contribution limits get a small bump to $7,300 annually.

• 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.

As of this writing (1/15/2022), the Backdoor Roth strategy survives for IRA conversions and in-plan “mega-backdoor” 401(k) conversions. There is still a large window of opportunity for Roth IRA conversions under current tax law through about 2025, then the Tax Cuts and Jobs Act rates will sunset. It’s not always a slam dunk, but it’s something that should be evaluated carefully.

Thanks for reading and cheers to another trip around the sun!

About the Author

Erik Barnes, CFP®, is a fee-only financial advisor serving clients locally in Naperville, IL, and the surrounding Chicagoland area and throughout the U.S. He is a member of XY Planning Network, a group of fee-only financial advisors who focus on serving those in Gen X and Gen Y, as well as NAPFA, Fee-Only Network, and the Financial Planning Association. Erik has worked in financial planning for 20 years and takes great pride in helping clients on the road to retirement. When he’s not building financial plans, you can find Erik tinkering with his fantasy football roster or checking out one of the many food spots in Chicagoland.