Foreword

In the mid-1800s, French writer Jean-Baptiste Alphonse Karr wrote “plus ça change, plus c’est la même chose” which has been translated into a now popular English phrase “The more things change, the more they stay the same.” For investors, change is an ever-present force that challenges us all. Economies, companies, geopolitical structures, technologies, and trends rise and fall, creating the gyrations in the market we come to know as volatility. As we reflect on the year 2021, change was the dominant theme. The world today seems quite different from the one we lived in this time last year. However, despite that change many things remain the same. The S&P 500 is set to post its 8th calendar year of double-digit returns in the last 10, reflecting a now decade long trend of outperformance. While new risks have emerged, the persistent challenges of elevated valuations and low interest rates remain. Change is almost always uncomfortable, but for those that are thoughtful about its impacts and pro-active about addressing the risks, opportunities can be created.

In this letter, Pathstone’s Chief Investment Office will take a look at the developments of 2021 and offer a perspective on emerging investment trends and themes we are focused on as we look ahead to 2022 and beyond.

The U.S. Federal Reserve (“Fed”), Bank of England (“BOE”) and European Central Bank (“ECB”), all met this week trying to solve the puzzle before them as it relates to stable consumer prices and full employment.  The Fed announced it would reduce its bond buying more quickly and indicated it is likely to begin raising interest rates in 2022.  Based on the Fed’s communication, markets are now anticipating a mid-point estimate of three 25bps hikes next year.  The Fed adjusted its expectations for increasing rates sooner, but importantly they did not change their view of where rates should settle in the longer run.  The BOE went ahead and pulled the trigger on its first interest rate hike since the covid pandemic, pushing their benchmark rate from 0.10% to 0.25%, a fifteen basis point increase.  Though the ECB is in the process of winding down its bond purchases, they confirmed that they will still be buying bonds through October of 2022.  In addition, they have made it clear that they have no intentions of an interest rate hike from its current -0.5% in 2022.

Once again, approaching year end we find ourselves in a time of legislative uncertainty impacting current and multi-year tax planning. While the latest House version of the Build Back Better Act has significantly narrowed the scope and potential impact of individual tax changes, the Senate continues to deliberate and negotiate, with no clear path forward. Accordingly, our planning advice remains steadfast – remain focused on executing long-term planning goals, while working opportunistically with advisors as the legislative environment remains in flux. Thoughtful, prudent, and flexible planning will transcend near-term political and regulatory distortions/distractions and serve your family for generations to come. Hence, consider the following opportunistic and strategic planning actions for 2021.