Year-End Review and Outlook

We begin our look back at 2021 with the sincere hope that you, your family, friends and extended networks have been safe and sound during this period of extended tumult. We are grateful for the trust you have placed in us as steward of your financial well-being. We hope to earn your continued confidence by making smart investment decisions that preserve and extend wealth and by being available to provide advice and counsel whenever needed. We are constructive on market prospects for the coming year and appreciate the opportunity to share our perspective on the market, economy and portfolio performance along with our 2022 outlook. 

We, like most of us, began the year 2021, with high hopes for a return to “normal.” The nation had just elected a predictable insider as Chief Executive, the rollout of a COVID vaccine promising unprecedented efficacy was underway and the economy had rebounded sharply from the initial shock of lockdowns and business interruption. While interest rates had begun to creep up from the record lows of 2020, and inflation, particularly in commodities, was rising, we believed that the combination of above-trendline earnings growth, supported by pent-up demand and aggressive fiscal stimulus, coupled with accommodative monetary policy would drive solid stock market outperformance. 

Indeed, the S&P 500 Index advanced 27% to 4,717, above our 4,500 target and representing the third straight year of double-digit growth. Better than forecast corporate profits powered these gains with earnings per share rising to $205(e) for the year, up close to 50% from 2020 and well above the $165 level expected in January 2021. On a sector basis, a rotation to cyclicals drove outperformance of energy and financials while technology stocks advanced as well, up 33% or 600 basis points above the index. 

For 2022, we expect another year of double-digit profit gains with S&P 500 earnings rising 10% to $226. Factors we did not foresee coming into 2021 - supply chain disruptions and, relatedly, a sharp spike in inflation, particularly for durable goods - will continue to cause agitas for short-term thinkers. The Omicron variant of the COVID-19 virus appears to have peaked as of this writing, reducing the potential for additional lockdowns and business impact in 2022, though we do see the potential for pockets of negativity arising from COVID-related holiday sales disruption in the retail sector. 

On inflation, we remain convinced that the profound supply/demand imbalances arising from the pandemic are largely responsible for the recent surge. We see price increases moderating over the course of the coming year as demand for durable goods normalizes, particularly relative to services. Additionally, while headline unemployment recently touched a record low of 3.9%, the labor force participation rate remains 300 basis points below its pre-pandemic level, suggesting more slack in the labor market that is generally recognized. 

At the same time, the massive pull forward in technology spend associated with implementing WFH policies is also likely to accelerate productivity improvements which are inherently deflationary. There is also over $17 trillion in negative yielding sovereign debt outstanding

globally, which should be both dollar positive and support demand for U.S. treasuries, further moderating inflationary forces. 

As such, we do not believe that a sharp rise in interest rates is likely. We do see yellow flags on the economic front, however with M2 growth moderating and the yield curve flattening considerably. Slowing growth in China with Q4 GDP expected to rise just 3.6% or well below the 8.1% gain for the full year represents an additional headwind. 

These factors support our positive conviction on growth. Your portfolio is populated with companies whose management teams have evolved business models capable of sustaining superior earnings growth and above-average returns on invested capital despite a potential moderation in the macro picture. For example, in 2022, we expect RAM portfolio holdings to deliver earnings growth of nearly 20%, or double the project S&P 500 gain. Yet currently these stocks are trading at only a modest premium to the market. 

As always, we are available at any time to clarify or elaborate on performance or perspective. If you’d like to review your account or discuss your financial picture for 2022 and beyond, please be in touch. We like hearing from you. 

Sincerely, 

Ed Vroom

Adele Weisman

Christopher E. Vroom, CFA, CFP®