Category: CIO Commentary

What Will Matter Most in 2022

Anticipating the most impactful events of each coming year is a Wall Street tradition, and one we can hardly pass up either. Every year significant things happen in the world that meaningfully impact the markets, and hence, your portfolio, whether or not you choose to specifically address these potential disruptions. For example, some believe that 2022 could see China invade Taiwan or Russia start a pan-European war. We do not expect either scenario (although Russia may indeed invade Ukraine) and so we are not currently positioning our portfolio for either possibility. Even though we are “doing nothing” about these issues, we would call that an important decision in and of itself. We are aware of the potential scenarios, but do not share a belief in their likelihood. Others will take different views and may position their portfolios either to avoid what they believe will be bad outcomes, or even attempt to benefit from such outcomes. Those who have positioned to avoid bad outcomes sometimes enable markets to end up rallying on, for example, “bad” economic numbers that are actually “less bad” than they expected, and vice versa. Ultimately, the market is a forward-looking discounting machine.

COVID Dynamics and Evolving Market Risks

The world is currently amid a COVID Delta variant surge.  Vaccines seem to be working fairly well against this new and more virulent Delta variant, but not perfectly.  Exact data has been hard to come by, but for the most part the serious cases of infections are so far occurring predominantly in unvaccinated people. With football starting and stadiums filling with excited fans we will really put vaccine efficacy to the test this fall.  The economic assistance programs that kept many countries afloat during the initial outbreak are ending, causing enormous numbers of people to face the dilemma of risking their health to work, or risking their financial well-being to stay home.  Rather than reinstituting assistance programs, many governments, including here in the US, are taking a harder line, and implementing mandatory vaccines for workers.  Mandatory vaccinations by governments and businesses will likely remain a controversial topic this fall and winter.  What we will try and do in this letter is outline what we believe are the potential impacts of these developments on the financial markets.

A Season for Change
Happily, we can confirm that most vaccines appear to be working and that COVID appears to be on the wane in most places throughout the world. It is not over, but with some luck it will be substantially contained within the next 12 months everywhere. That means back to business as “normal” as we remember it. We will need to factor all the changes that COVID has forced onto the world into our investment thinking, of course, but at least we will not have to experience as much medical tragedy nor try to read epidemiological tea leaves (we hope) much longer. The great acceleration in technology adoption COVID forced upon the world may be a long-lasting phenomenon, we’ll see. Our first order of business in this re-opening, if you will, is to take stock of the basics.

Nearly six years ago, as we took the investment Hippocratic oath to do no harm, our first order of business was to eliminate portfolio exposures expected to underperform. The first thing we did was eliminate dedicated exposures to capital intensive sectors (commodities and REITs) from our equity portfolios. We also determined that Europe was not well positioned to produce attractive returns primarily because their equity markets were heavily skewed toward bank and other value-oriented stocks and the political/monetary structure of the Eurozone seemed destined not to work, at least not as well as other regions. While our longer-term Europe thesis may still be correct, for the next few years we think the tables may tilt back towards Europe (more later).