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  • Chip Barnett

“Price is what you pay; value is what you get."

- Warren Buffett


January 2022


2021 was a strong year for large cap stocks, up almost 29%. Select areas like large tech and REITs did even better. Bonds were slightly negative, down about 1.5%.


I’m optimistic about investment returns in 2022. Macro trends, like global consumers trying to spend on goods and services that they’ve paused during Covid, should continue. Higher prices and higher wages should encourage more people to get jobs, which in turn would ease supply chain issues.


Like every year, investors shouldn’t expect an exact repeat of last year. There are headwinds: stimulus spending is largely in the past, and the Federal Reserve is reversing its easy money policy.


While I think the positives outweigh the negatives, I think stock investors are more likely to get rich slowly over the next several years. There will be ups and downs this year.


The Fed’s shift in policy is a big deal, because it’s infrequent and involves borrowing costs. Historically, low or falling interest rates meant “times” were good, and investors would reward grand business concepts. Usually, rising rates had the opposite effect, with investors favoring tangible profits. In the easy money recent years, large cap growth like Apple, Google, Tesla, Facebook, Netflix etc. did very well, and are now expensive. Since the Fed’s November hawkish comments, growth has struggled while value stocks - financials, energy, consumer staples - has done better.


This is a chart of growth (gold) and value (black) over the past ten years. Over the long run, value and growth tend to have similar annualized returns. In the past few years, growth has been the clear winner, arguably because the Fed lowered interest rates in response to Covid. I think the Fed’s shift to increasing rates in 2022 is a good reason to expect value to now outperform growth.


Over much of the past year, I have gradually increased portfolio exposure to value and small cap, while reducing the size of our large cap growth. Bonds, while important for portfolio diversification, are not likely to perform well in a higher inflation environment (because interest payments are fixed and don’t adjust for inflation), so we’ve also reduced our exposure there.


This re-positioning is prudent, in that large cap tech can’t outperform forever, but also fits historical patterns. There are no guarantees - the first week in January is hardly a good basis for a full year’s prediction - but trends in recent weeks suggest value is in favor.



Sincerely,


Chip


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