2020-2021 Macro/Equity Market Recap
After a truly unprecedented stretch in both the market and the world as we know it, we look for 2022 to be a year where we begin to move forward to a more normalized, albeit changed, environment. In 2020 the U.S. and the rest of the world saw the economy go into recession (COVID-induced) for the first time since the Great Financial Crisis with growth rates being zapped into negative territory from the low to mid-single digit rates we had been accustomed to. The markets reacted swiftly in March of 2020 which created opportunities for easy money to be made with discounted share prices, the Federal Reserve pumping money into the system and the steadfast realization that we would persevere through a global health crisis. This environment persisted for much of 2020 and into 2021. With vaccines becoming widely available, a more mild variant and the want to move on, markets were supportive. Towards the end of 2021 however investors became wary about persistent inflation (rising prices) and in turn the Federal response.
In terms of inflation, the writing should’ve been on the wall given that we completely closed off economic activity and then flooded the system with stimulus to spark demand. The economy is not a hose that can be turned on and off but is an interconnected global system with tons of moving parts. Kinks are to be expected. In order to keep inflation in order, the Federal Reserve must use its “tool-kit” and raise the Fed Funds rate from record low levels. This fear has bled into the market and caused severe pain for past outperformers given sky-high valuations. This has hit small-cap and growth stocks square in the face and led to some double digit losses in the month of January.
What to Expect Moving Forward into 2022
At Genvest, we welcome this more normalized environment and think that periods of “easy money” are over. Now the onus is on us to do our research, dig in and find great companies that we can stick with over the long haul. We have a focus on what we call “quality growth”: to us this means a clear path to strong and growing cash flow generation, a defensible business model in a desirable market where the end consumer benefits, and an eye towards the future. Many names we feel fit the bill have taken a hit early in the year and this marks opportunity. While we might not see high double digit returns in the S&P 500 this is a stock pickers environment where outperformance can be had.
Overall we think that the pandemic and its effects on the market are fastly approaching the end and that supply chains will be shored up in the back half of 2022 but will still face some potential challenges. The market has priced in upwards of 4-5 rate hikes coming with the Fed which we are comfortable with but markets could react in a negative fashion to this at times. This has already led to multiple compressions and volatility at times will be elevated, but earnings growth should remain strong in many businesses which will be the driver of returns. After the dip in January, there should be an opportunity to recover to the more normalized returns (the S&P annualizes about +10.5% since 1957) for the rest of 2022. Overall we remain optimistic and are excited to go to work.
Business/Industry Trends Moving Forward
Generally we maintain our same philosophy of owning quality businesses for the long haul. Moving through 2022 we expect to continue to benefit from ownership of large, cash flow generating titans such as Apple, Google, Microsoft and a select number of others but feel that the FAANMNG trade will be more divergent than in past years where there will be winners, losers and new entrants in dominant positions. With that being said, selectivity will become more important across the board.
Another area where we see opportunities is picking up some of the higher growing names at a discount thanks to recent market dislocations. Examples of these businesses include Adobe, PayPal and a handful of other names we have been monitoring but have been uncomfortable with valuations. This is particularly true with fast growing businesses in trending industries such as Fintech, Cloud Computing Services, Health Services, Cyber Security, Semiconductors and Digitization as we move into a constantly evolving tech based society. Lastly, as we come out of the pandemic we look to reopening trades in the leisure and service industries as we are all eager to move on and return to normal consumer habits.
