REFLECTIONS ON THE PAST YEAR AND EXPECTATIONS FOR 2022

To our clients, professional advisor resources, and friends

We would like to commence our first of the year message by offering gratitude and sincere appreciation for our clients during this past year filled with so many unknowns.  2021 started with a new administration in DC, ongoing economic worry, and the job wreckage perpetrated by COVID-19 related lockdowns.  The markets proved to be quite resilient and very responsive to the Federal Reserve’s five trillion dollar expansion of the money supply that was designed to offset the deflationary impact of the slowdown. Not surprisingly, Americans pivoted to new ways of communication, while ever adapting our means of physical interaction with others.  Big and small business resolved to become nimble and exercised great flexibility, ranging from maneuvering for survival to achieving spectacular growth.  Through it all, StrongBox Wealth’s clients trusted our judgment, financial guidance, and investment management exercised on your behalf.  Our heartfelt thank you for your ongoing confidence in us.

StrongBox Wealth team is growing

By now, most of you have come to know Amanda Robinson and her cheerful welcoming way. Joining us January 2021, Amanda serves ongoing client needs and oversees many special projects. Prior to StrongBox Wealth, Amanda gained experience as a bank Assistant Manager, along with 14 years in ministry in the St. Louis region. In 2022, Amanda looks forward to cheering at her daughter’s collegiate softball games, volunteering for numerous church activities and, alongside her husband, guiding their two young adult children into the next chapter of their lives.

Andrew Beil, CFP®, joined us in May 2021.  As a leader in delivering the StrongBox Wealth experience for existing and new client relationships, he guides clients through a discovery process to develop and maintain their financial plan while recommending implementation strategies to achieve their financial goals and objectives, including specific recommendations in cash management, asset allocation, investment risk strategy, insurance coverage, charitable planning, and retirement income planning. Prior to joining StrongBox Wealth, Andrew served as Prime Capital Investment Advisors’ Director of Financial Planning, a primary resource for delivering the firm’s financial planning strategies to its clients.  Andrew started his career in the financial services industry with American Century Investments in 2014.  While there, he gained experience in high net worth client development and corporate retirement plans. Andrew earned his Bachelor of Business Administration with an emphasis in finance from the University of Missouri – Columbia.  He is accredited as a CERTIFIED FINANCIAL PLANNER™.  Andrew lives in Overland Park, KS, with his wife and young daughter.  He enjoys playing golf and cooking during his free time.   

StrongBox Wealth Foundation Fund

We are pleased to announce the creation of the StrongBox Wealth Foundation Fund which will support charitable organizations focused on financial literacy and nonprofit organizations of choice for our team members and clients.  A truly special time for us as financial advisors occurs when we can introduce and explain the concepts of investing and financial planning to typically young or disadvantaged people.  Our Foundation Fund will serve as a catalyst to enable financial literacy by teaching good habits of budget aligned spending and savings. Instilling this knowledge will produce a multiplier effect to equip people in being more resourceful in understanding and prioritizing their finances.

Events

Making COVID precautions a priority over our typically robust client event schedule, we did manage to host and have a great time with clients at Faulkner’s Ranch in Kansas City for the 2021 Fall Family Fun Day.  Thank you to everyone who made it out to join in for a great time.  We also returned to hosting bi-monthly Decision Makers Report at Summit Grill in Lee’s Summit.  Our goal is to provide timely market related and special interest topic information updates, such as tax legislation proposals or the state of real estate, with a subject matter expert speaker in a relaxed atmosphere over a quick one hour.  Please let us know if you have an interest in attending future Decision Makers Report events.

Nashville Investments Forum

For us as Wealth Advisors, it is important to sharpen the saw by being positioned to listen and learn from thought leaders in the economic, market, investments, business, entrepreneurship, and political spectrums.  This past November, Chuck and Jon attended the Dynasty Financial Partners Investments Forum in Nashville.  The lineup of speakers was premier.  Beyond face-to-face interaction with top strategists and portfolio managers with the nation’s top asset management firms, notable speaker names included:

Alexis Ohanian – Entrepreneur, Former Exec. Chair, Reddit

Jeb Bush – Former Governor of Florida

Steve Case – Chairman/CEO, Revolution; Co-Founder, AOL

Howard Marks – Co-Chair OakTree Capital

Liz Ann Sounders – Chief Investment Strategist, Charles Schwab

Daymond John – Entrepreneur, Shark Tank Reality TV Judge

Jim Nantz – CBS Sports Commentator 

Avery Johnson – NBA All-Star, Former NBA and NCAA Head Basketball Coach

Topping off the Forum, country music super star, Clint Black, gave a one of a kind acoustic performance!

Portfolio Positioning Strategies

Reminders of what we do day-to-day on a tactical basis for clients as part of the portfolio management process:

Diversification – Particularly during times of market volatility, diversification means having low-and negatively-correlated investment exposures that counterbalance price movements in other assets.  “No matter what, don’t keep your eggs in one basket”

Rebalancing – Trimming exposure to assets that have grown to represent too large a portion of the overall portfolio, while at the same time, adding exposure to high quality assets that have fallen out of favor.  “Prune the hedge to keep it healthy”

Risk Management – Maintaining perspective to recognize when markets have become consumed either by unrealistic expectations or momentum, then understanding the degree of price dislocation and the appropriate roles of liquidity needed alongside complementary financial and alternative assets in the context of inflation trends, monetary policy, currency strength, market volatility and stage of the economic cycle. “Markets have always regressed to the mean”

Reinvestment – Encompassing an emphasis on the tradeoff between investment income return versus capital growth, while understanding the critical long-term importance to capture dividend, interest, and other income cash flows for what has historically been a significant contribution to total return.  “Dividend checks don’t bounce”

Portfolio Positioning Principles

Beyond tactical strategies, there are self-governing principles that we stay true to in managing client assets. Being mindful to challenge our assumptions by not automatically following market sentiment and the herd mentality, we constantly assess risk tradeoffs through cost benefit analysis and apply accordingly in portfolio positioning, based on multiple factors including:

Paying attention to the value of money – It is essential that we monitor and anticipate the likelihood of money printing, currency fluctuations, government debt monetization, and shifts within the credit cycles all to service America’s massive explicit government indebtedness and the enormous implicit obligations of pension and healthcare promises.

Concentrating on “All-Weather” sectors and companies – We believe client portfolios should be rich in owning “camels”, not too many “horses”.  In other words, we will position investments that have historically shown resilience and provided flexibility by adapting to thrive during constantly changing environments in the economic and interest rate cycles.

Distinguishing between temporary and permanent change – COVID accelerated changes to the ways we work and live.  There are significant commercial and financial implications of the paradigm shifts in “work from home” or “work from anywhere” employment, logistics, supply-chain, leisure, wellness, communication, new energy sources and resources, and transportation.  Certain aspects of these changes may prove temporary, but most appear here to stay.

Taking advantage of demographic tailwinds – We will gain exposure to companies meeting the rising needs, aspirations, and spending power of the rapidly expanding and increasingly significant global middle class.

Comprehending and verifying past success – A demonstrated successful track record and past experience suggest that owning companies with competitive preeminence, historically rising shareholder dividends, abundant free cash flow generation, balance sheet strength, focus on risk management, strong executive leadership, and sustainably defensible business models will continue to be the way forward in our stock positioning for client portfolios.

Identifying innovative and disruptive technology – The pace and scale of technology’s convergence into myriad parts of our economy is astounding.  This innovation will be a force of change and should render continued meaningful economic growth.  History may well later reflect that we are today in the midst of an “industrial revolution” being led by disruptive innovation in biotechnology, AI, data analytics, machine learning, 5G, Internet of Things, robotics, battery technologies, electric vehicles, energy efficiency, personal wellbeing, virtual reality and augmented reality (metaverse).

Social Media

We regularly post economic, market, and often fun content on social media.  If you are not yet part of StrongBox Wealth’s social media platforms, please connect with us or follow us at:

Facebook — https://www.facebook.com/StrongBoxWealth

LinkedIn — https://www.linkedin.com/company/strongbox-wealth/

Twitter — @StrongBoxWealth

National News

As Managing Partner for StrongBox Wealth, Chuck is regularly asked to participate in interviews and provide quotes for national financial publications.  Check out these articles and features from 2021 on our StrongBox Wealth website in the “News & Commentary” section or a sampling linked here:

Advisors Can Help Clients Develop Charitable Giving Strategies

FAs Weigh in: Biden’s Tax Proposals Merit Re-Examination of Estate Plans

Where to Invest $100,000 Right Now

A Look Ahead to 2022

GDP — The fourth quarter data to be released in January will show 2021 had the fastest GDP growth and highest inflation since the 1980s.  Economic growth is estimated to pick up in 4Q21, and as of December 9th, the GDPNow forecasting model of the Federal Reserve Bank of Atlanta was estimating an +8.7% annualized rate of GDP growth for the fourth quarter of 2021. We have never seen such a rapid peacetime expansion of federal spending, and we have rarely seen such a huge increase in the money supply. Thus, we are not experiencing a normal business cycle and should keep perspective to not treat it like one. 

Our base case view remains that the U.S. economy will continue a positive growth trajectory, even as the growth rate in certain sectors slows somewhat from the rapid rates of recovery experienced over the last year and a half. Labor shortages, lingering logistical bottlenecks, Delta and Omicron variant disruptions, and cost pressures dampened the growth outlook for the second half of 2021, with some portion of the shortfall from prior full-year growth estimates being added to full-year GDP growth estimates for 2022. The rebound in private business investment, an important component of helping to ease supply bottlenecks, continues to progress and may be subject to reductions reflecting the uncertain outlook for final demand.

We expect real GDP to rise at about a 3.0% rate in 2022, slower than 2021 because it was artificially boosted by big deficit spending. Small businesses are the backbone of the American economy and we believe their continued grit and resilience will show itself, facilitated a bit more given prospects of higher taxes being shelved for now.

Right or wrong, shutting down the economy destroyed supply chains and paying people not to work after the economy reopened made it worse.  Small businesses suffered much more than large companies, so while profits and stock prices are at, or near, all-time highs, real GDP will still end 2021 lower than it would have if COVID had never happened.

Inflation — As some inflation measures have moved from signaling price stability to signaling acceleration in underlying inflation, market participants have been attempting to assess just how enduring these high inflation rates will be as the economy continues to recover from the pandemic. In our opinion, investors should expect inflation to remain elevated until the bottlenecks in the global supply chain and labor cost increases are alleviated, thus helping supply rise to meet high demand levels and theoretically bring down the rate of gain in prices. These more balanced supply-demand conditions look to us at this point like they are not likely to appear until the second half of 2022.

Inflation looks to come in around 6.5 – 7.0% range for 2021. Consensus estimates for 2022 are that inflation, as measured by CPI, will slow to 2.7%.  We tend to disagree with that consensus and suggest instead that inflation will run hot, potentially up to 4.0%. Housing rents make up more than 30% of measured CPI.  Without COVID related rent rate moratoriums and the positive tailwind of the job recovery, we feel rental rates will be a key driver of inflation over the next few years. These points in aggregate mean that inflation will remain a large part of the 2022 narrative, if not an obsessive fact.  At the same time, we believe that rapid technology advancements and resulting efficiencies play a distinct disinflationary role to offset rising costs.

Jobs — As reported in the December 8th BLS Job Openings and Labor Turnover Survey (JOLTS) through the end of October, 11.0 million job openings remained unfilled. These data indicate that it is taking a considerable length of time for employers to add staff and that workers are likely taking advantage of the sturdy employment market in search of higher pay, improved work conditions, or opportunities elsewhere.  Job market gains should remain solid. Still, with this nice pace of increase in jobs, keep perspective that we would still be around pre-COVID levels by the end of 2022.  Although the unemployment rate is tracking toward 3.5% with the Federal Reserve targeting such level by end of 2022, the labor force participation rate remains much lower.  Those who left the job market over the last two years may be lured back in with rising wages.

Wildcards – Geopolitical risks are indeed present and potentially significant.  In dispute of plans for Ukraine to join NATO, Russian President Vladimir Putin’s buildup of troops on the eastern Ukraine border is worrisome. Many geopolitical analysts fear Chinese President Xi Jinping’s rhetoric surrounding Taiwan’s sovereignty, along with ongoing South China Sea territorial disputes, will eventually lead to a show of military force event.  Either of these geopolitical flashpoints would be a gamechanger for the stock and bond markets, especially contingent on the degree of force response from the U.S. and its allies.

Something to think about…

The chart below shows the makeup and relative size of the world’s largest eight publicly traded companies and how this mix has substantially changed over the last 15+ years.  Note that Microsoft is the only company on both lists, albeit now tenfold larger than in 2005!  The takeaway is technology has been leading the way and we are entrenched in a fascinating age of innovation.  However, our caution is that beanstalks certainly don’t grow to the sky nor are they real anyway.  Given the natural evolution and destined changes in market leadership over time, we will likely trim positions during portfolio rebalancing in 2022 for those owning these widely held individual stock names.

Wrapping Up

In closing, bull markets are more fun than bear markets.  Yet, history has shown that markets are strongest when they are broad and weakest when they narrow to a handful of blue chip companies.  Understand that the current market weighting of the top ten companies in the S&P 500 is 31%, the highest in decades. Markets tend to return to the mean over time and built up excesses usually lead to opposite excess in the other direction.  For long term investors though, this is simply an acknowledgement of today’s circumstance and part of the investment equation involved in pursuing to build net worth and rising investment income over time.  It is a constant that markets have always climbed a wall of worry, while the context of those worries are and will be perpetually different.  From our perspective, as always, we will monitor the risks and manage money as deemed necessary, keeping portfolios balanced in abidance with each client’s objectives while owning quality.  Through all the noise, we remain bullish on America and keep faith in the driving forces behind our collective entrepreneurial spirit that drives innovation and provides fertile ground to sow the seeds for capital markets to thrive over the long term. 

From our StrongBox Wealth family to you and yours, we look forward to working with you in this new year and wish you a safe, healthy, and prosperous 2022!  Thank you for the opportunity to serve as your wealth advisor.