Welcome to our first edition of Graphs and Geekery for 2022! And congratulations on making it through another challenging year. Below are some comments on economic and investment topics for 2021 that we hope might be illuminating, or at least interesting.
If you haven’t heard some sort of sensational inflation story, please invite me to hide with you in your retreat, because it is clearly very well sound-proofed. “Headline inflation,” or the change in the Consumer Price Index for Urban Users over the past 12 months, was indeed an unsettling 7.0% in December. Below, our first graph shows us inflation in the US for the past 70ish years, with the highlighted date being when the US left the gold standard for valuing our currency.
If we had reason to believe that inflation would persist at this pace, it would be fair to worry. I do not anticipate this to be the case. Instead, I suspect we will see ongoing variance from sector to sector (energy and vehicles being ongoing troublemakers, for example) as the world continues to adjust to the corona virus, shifting demand for sustainable energy sources, changed lifestyles from ongoing remote work, and so on. Unfortunately I have no means of telling when that variation will return to a more historically “normal” pattern, but I would not anticipate it before the labor market has adjusted somewhat. The current mismatch of open positions and available workers presents challenges that are difficult to remedy with hiring bonuses or even raises.
- SPX: S&P 500 Index – US Large Cap Stocks
- RUA: Russell 3000 Index – US Stocks, Large-, Mid-, and Small-cap
- EFA: iShares MSCI EAFE ETF – Large cap stocks of developed markets other than the US and Canada
- EEM: iShares MSCI Emerging Markets ETF – Large cap stocks in emerging markets, including China
- AGG: iShares Core US Aggregate Bond ETF – US investment-grade bonds including Treasury and corporate debt
- IAGG: iShares International Aggregate Bond ETF – Non-US dollar denominated foreign bonds including government and corporate debt in developed and emerging markets
Source: Wall Street Journal. Russell, MSCI and Barclay’s indices represented by iShares ETFs. Past performance does not guarantee future results.
Stocks continued to perform remarkably well considering the chaos swirling about us. Bonds drifted slightly negative over the year, which is not surprising when we are anticipating rising interest rates as the Fed has alerted us to do. If you really want to geek out, or you’re having trouble falling asleep, you could read the Federal Open Market Committee Statements as they are released, and play “what did the market think of that?” It seemed to me all year that Fed announcements gave huge amounts of lead time for market adjustments – “we might have to ease up on buying bonds… okay we will ease up on buying bonds soon… really we’re gonna buy fewer bonds really soon…” I keep telling myself if I give my kids fewer warnings than the central banks give the securities markets, I’m doing a good job being stern. Professional investors are known to pour over these statements (the feds, not me telling my kids to put their shoes on for the tenth time) and debate the significance of individual word changes.
Gross Domestic Product
I like gross domestic product as a better measure of how we are doing as a nation. How much stuff and services did we produce? Below the solid line answers that line, adjusted for inflation. The dashed line is GDP per capita – if we produce 10% more but there are 10% more people, standard of living isn’t necessarily improved. I find it interesting that the two have diverged during the pandemic. I suspect even those of us who have taken well to remote working can see ways that as a country we are still fighting to regain productivity.