The year of the pandemic led into another year of COVID but with a hefty dose of inflation. The Consumer Price Index (CPI) in the United States rose 7% in 2021, its highest level in nearly 40 years. The ramifications of this could impact every market going forward, especially as it affects central bank policy, which has been mostly dovish for the past decade. Unlike previous periods, where price levels remained in check, and they could be patient, they left themselves little choice this time. The “Fed Put,” which describes their tacit support of equity prices and low rates, now shows real consequences. If they want to add stimulus to support the market, they must balance it against the risk of inflation.          

Returns below show what you would expect for the most part. Investors flocked to alternative currencies while prices of energy, commodities, real estate, and stocks went up. Oddly the value of the dollar improved against other currencies, and gold fell. This reflects that while the US central bank prints money, everyone else does too, and the US economy appears to be stronger than many others. The decline in gold is disappointing for many looking at it as a store of value in inflationary periods. Perhaps cryptocurrencies are competing for this piece of the portfolio.

Asset ClassPerformance 2021
Crude Oil WTI56.40%
S&P GSCI (Commodities)37.10%
Dow Jones Real Estate Index35.10%
S&P 500 26.90%
US Dollar Index6.40%
TIPS (TIP)5.70%
Gold -3.60%

What can we expect in 2022? The biggest driver, in my opinion, will be central banks. If they are serious about taming inflation, they need to remove stimulus and raise rates. If they do too little, inflation will continue, negatively impacting consumers and resulting in less spending and lower optimism going forward. The other alternative, where inflation gets reined in, could result in lower asset prices impacting real estate, company valuations, commodities, and more.  

The free ride with the stock market that only seems to go up may be in jeopardy. Investors would be wise to protect themselves with investments that can trade long or short and across a wide variety of assets because a lot can change quickly. An election year in the United States, COVID, central bank policy changes, and building doubt about the competency of our leaders are just a short list of what could drive prices.  

Please let us know if you would like any advice on diversifying your portfolio to handle these potential changes. We are happy to help.  

Photo by Valentin Balan on Unsplash