“My costliest mistakes have come whenever I grew impatient or envious of other people’s returns and strayed off course by gambling on private companies or individual stocks that held the promise of a racier roads to riches. The paradox here is that the slower road almost always proves to be the faster in the end. The investors I admire most tend to be heroically inactive, not because they’re lazy but because they recognize the benefits of patience.”

– William Green – Richer, Wiser, Happier

2021 will be remembered by the seemingly never-ending Coronavirus and two new COVID-19 variants, massive supply chain disruptions, cryptocurrency mania, excessive special purpose acquisition companies (SPACs) issuance, and of course, inflation. We witnessed craziness, not unlike the dot-com era of 1999-2000, with trading of meme stocks and resulting short squeezes, as well as massive real estate price increases. We recall when Texas froze in February, leading to an outright energy crunch, in addition to the rise in alternative energy and green initiatives, especially battery-powered vehicles. Yet, 2021 proved to be an unusually stable and good year for stock returns.

The tech giants FAAMG (+Tesla) dominated the market and the S&P 500 again. The Stoxx Euro 600 had a really good year as many European stocks came out of their 2020 doldrums, while the Shanghai composite and the Japanese Nikkei really struggled. Given the astonishing amount of liquidity provided by the U.S. Federal Reserve, it is no wonder the U.S. market outperformed the rest of the world. We doubt this continues. Math and valuations stand in the way. Apple is worth almost $3 trillion, Microsoft almost $2.5 trillion, Google $2 trillion, Amazon $1.7 trillion with Facebook and Tesla almost $1 trillion each. These companies’ stock multiples have been the main absorbers of the massive liquidity injected by the Fed. It would seem to us mathematically difficult for these few tech giants to appreciate further at the rate of the last ten years. Therefore, we would caution you about the idiosyncratic risk of this cohort’s downturn and the creation of more market fragility.

We expect the Federal Reserve will keep its word in 2022 and taper its bond-buying program in advance of actually raising the funds rate. Other possibilities might include shrinking the size of the Fed’s balance sheet resulting in much less liquidity or rocket fuel for stocks and bonds. This should impact the “valuation anchor,” the 10-year U.S. Treasury note yield, resulting in effects on most all asset classes. The Fed is still the dominant force in our markets, and we will be watching closely the changing winds that are stiffening.

We want to remind you that the Fed’s involvement in the stock and bond markets (to this extreme) dates back to the 2008 Great Financial Crisis. 13 years. A veritable “liquidity faucet” has been running this entire time, albeit a few attempts to slow it in 2013 and 2018. Both attempts resulted in size-able corrections in stock prices. This faucet has been wide open, with increased pressure since the pandemic started in March 2020. Turning off the faucet in 2022 might prove dicey.

As we close out the year, we are not surprised by the dramatic change we have seen underneath the markets’ current this fall. We wrote earlier in the year warning you that blank check companies known as special purpose acquisition companies, (or SPACs), did not provide the investing public with complete information about their businesses. We cautioned that there was insufficient protection against conflicts of interest and fraud with some SPACs, and many IPOs this year. On December 10th, the Wall Street Journal reported that Securities and Exchange Commission (SEC) Chairman Gary Gensler has asked his SEC staff for proposals to focus more on disclosure requirements and marketing practices. This should change the somewhat dangerous process of allowing SPACs to make revenue and profit projections that are not allowed in traditional IPOs. Nikola Corp. will likely pay $125 million to settle an investigation into allegedly misleading statements when going public through a SPAC, according to The Wall Street Journal. The company hasn’t delivered any trucks to customers yet, but it is valued at $4 billion.

We also cautioned readers of the stock trading frenzy earlier in the year fueled in part by the retail trading platform, Robinhood, and the trading of meme stocks. Robinhood’s stock is off over 40% from its IPO price and over 70% below its intraday high of $85.00 earlier this year. Many of the meme stocks have had significant corrections as well.

Read our full investment commentary and letter to clients by downloading the 2021 Year End Letter.