Happy Fri-YAY, 2022! We hope that everyone’s new year is off to a roaring start. It’s been a while since our last update so we will get right to it.
In December, the Omicron variant of COVID turned into the proverbial lump of coal, tamping down the prospects for a “Santa Rally” in the stock
market. Performance was still strong, but we didn’t see the larger push-up that we have seen in years past. That’s probably more helpful than not. Gains overall in 2021 were strong so a little sideways action is needed to prevent overheating.
While stocks did have a good year, it was really a two-part story. The first 7-8 months of the year were all about the stocks of the NASDAQ that, as a whole, are more tech, growth, and speculation focused. In describing your business, if you could use the word “cloud” in any capacity, you were printing money (think using the word “web” in 1998). Since that peak, 40% of the names in that index are down 50%. Whoops.
Right around the time the “clouds” turned dark, the sky cleared for more traditional, cyclical companies (read: boring) that actually make something or do something (weird concept, right?). It was this portion of the stock market that grabbed the baton and ran a strong leg to the 2021 finish line. Some of this started with talks of an infrastructure bill but, as we know, that didn’t happen. What did happen can be seen as more of a natural rotation from overvalued companies to fairly valued companies, a healthy move for markets overall. A rotation of this sort reduces the risk of an overall correction where the baby gets thrown out with the bathwater.
Our portfolios at High Note are diversified so while we have some holdings that fit the simplistic descriptions above, we have much more of the latter than the former. That can lead to FOMO when the high-fliers are flying high but a relief when they start to unwind.
More than the infrastructure bill, the driver of this rotation was overall economic conditions improving. The arrival of the Omicron variant was quickly determined to be more contagious, but less virulent by market participants. Whether that is actually the case is probably still TBD, but it was good enough information for the market to move on and the economy to stay open. With that has come strong job reports, increased earnings, inflation, and a Federal Reserve that is ready to act. That leads to interest rates moving up and here we are.
In the last week, the 10-Year Treasury yield has moved from 1.51% to 1.77% which is still MEGA low. Just as a reminder, that means that if you are willing to lend your hard-earned dollars to Uncle Sammy you will get a return of 1.77% each and every year for ten years. Not great. So, the overall number is paltry but that is a 17.2% increase in the rate in a short amount of time. It’s too long of a concept to get into here, but we can say generally that Cloud stocks/speculative stocks don’t perform well with interest rates going up. What does perform tends to be companies with strong cash flow; financials/banks and stocks that are increasing dividends to name a few.
That’s the market set up as we sit today. It’s nice to know and fun to understand, but it really doesn’t mean that tomorrow will be the same. Interest rates can decrease just as fast as they increase, and we could go from an undersupply of goods to an oversupply in what feels like a day. If we knew for certain, it would be cheating and that’s not cool. Like other years, 2022 will be a daily process of learning, analyzing, understanding, and executing – a challenge we fully embrace.
We will be on our regular every-other-week schedule for the year trying to keep readers up to date with all things financial and providing some insight into how we are positioned. As always, if you want a deeper dive into any of the topics in these notes or anything else, just say the word. We are happy to discuss and here to help.
All the best.
High Note Quick Hits
Craptocurrencies
The recent sell-off in the cryptos is something to behold. A couple of weeks before Thanksgiving, Bitcoin was trading around $66k. Today you can buy it for $41k. That’s a cool and easy drop of 38% is not quite two months. Yowzer. The reason for the drop is obvious – NOBODY HAS ANY IDEA WHY IT DROPPED. That’s just what it does. The “maximalists” will tell you it’s just part of the process while the skeptics will say, “about time.” The free fall does seem correlated with Cloud stocks and a de-risking of anything speculative, but many promoters of the technology have claimed those two things are not correlated. So, it’s hard to say exactly what’s going on besides understanding it’s a rollercoaster that isn’t going out of service anytime soon. The picture below is a fun visual of the times that Bitcoin has “died.” The website, 99 Bitcoins, tracks all of the “obituaries” that have been written with the intent to place the final nail in the crypto’s coffin. As “maximalists,” their point is that no matter how many times pundits try to close the door on the coin, they can’t. The argument of whether they genuinely can’t or just haven’t yet will continue in the near term while the rollercoaster zips along.
100 Years and Running
We like to run our financial plans assuming everyone lives to age 100. It sounds like a stretch to some, but the reality is that many people alive today will reach the century mark. Attached is a fun little article that focuses on the 100 “dos” and “don’ts” to increase your odds of hitting triple digits. One of our favorites is 67 which is “Don’t Blame Your Genes” noting that only 25% of our longevity can be attributable to our parents and grandparents. We’ve known this for years as life insurance companies use this as their modeling for longevity prediction and they are very, very good at it. Fascinating stuff. Here is the article.
