Will this year ever end?

Few of us expected this year to be so difficult.  After a year (2020) in which a pandemic swept through the world and governments everywhere struggled to cope with something they did not understand by shutting things down, I think we had some reason to hope for substantial improvement in 2021.

Think about where we were a year ago:

1. Perhaps the single most important event of 2020 was the creation of not one but several effective vaccines in record time. We now had an effective weapon to stop the dread Covid-19 virus, not just “flatten the curve.”
2. After shutting down much of the economy, here and abroad, we were reopening and starting it up.
3. After a tumultuous (to say the least) election process, we were about to transition to a new administration.
4. People were getting back to work, although not necessarily in the office. Much was still uncertain, and many old assumptions about the nature of work were now being reexamined.  Much of that was good.
5. After plunging in March, the fastest bear market in a long time, equities not only recovered but finished positive for 2020.
   1. Pre-vaccine, the market was driven by “Big Tech,” the handful of large technology companies like Apple and Google which thrived during the pandemic.
   2. The so-called ‘reopening trade” began before the official announcement of the vaccine. The market seemed to know what was not yet announced; small and value stocks rallied sharply.  These companies were most hurt by the lockdowns and were relatively cheap by then.
   3. Bottom line – forward-looking capital markets were optimistic, giving us cause for hope.

So what happened?

Well, oddly enough, even as we sit here considering how difficult this year has been and how much went wrong, capital markets continued to perform quite well.  As of the close on December 23, the S&P 500 was up over 27% for the year![i]  And interest rates have not gone sharply higher; bonds performed fairly well.  A very good year for a well-diversified portfolio.

We are certainly not in a position to opine on all the issues relating to the handling of the pandemic; there is really no point to that exercise in this context.  We are thinking primarily about our long-term financial plans for success and how best to navigate troubled waters.

We can make a non-comprehensive list of troublesome issues:

1. Variants of the Covid-19 virus created new waves of infections, even among the vaccinated.
2. The confusion over tactics for combatting the spread of the virus continued unabated. The quiet voices of scientific reason were not always heard above the controversies.[ii]
3. The Fed ran a loose monetary policy, perhaps for too long. So now we have significant inflation such as we have not seen in decades.  But that is not necessarily bad for equities and real estate.
4. Even as the official unemployment rate drops to historically low levels, we are still over three million people short of where the labor force was before all this happened. We have well over 10 million jobs unfilled, and that is bad for the economy.
5. People who are working are experiencing a lot of stress. We have a lot of burnout in our workforce, and people are changing jobs at an unprecedented pace.
6. Disrupted supply chains, impacted by the shutdowns, labor shortages and other factors, are resulting in shortages and empty shelves.

But Wait!

There is some good news:

1. As I mentioned, the equity markets are doing very well, growing portfolios and giving us some hope for better outcomes next year.
2. On December 22 the FDA approved the new Pfizer pill for emergency use. This pill has proven to be highly effective at preventing people who get Covid from becoming seriously ill.  That is a real game-changer.[iii]
   1. The vaccines are the first line of defense, of course.
   2. This new treatment has the potential to save perhaps 90% of the cases, whether people are “breakthrough cases” or unvaccinated.[iv]
   3. We are now starting to see something long overdue – the reporting is shifting from “new cases” to “hospitalizations and deaths.” If we can minimize hospitalizations and deaths, that is what really matters.

Let’s wrap it up

We have come through two difficult and in some ways tragic years.  Things are still difficult in some ways, but many things are improving.  From a financial perspective, this period has illustrated how quickly and unpredictably markets can move, and how important it is to have a coherent strategy that we follow with discipline.

As we approach the end of the year, we wish all of you a wonderful holiday season and the very best new year.  You deserve it.

Sincerely,

Roger Hewins

President

[i] Source: Morningstar Direct. Data as of 12/23/2021.

[ii] One such voice, IMHO, is that of Dr. Scott Gottlieb, former FDA Commissioner and frequent contributor on CNBC, as Covid knowledge became essential for the capital markets.  He just published a good book on the subject entitled “Uncontrolled Spread, Why Covid-19 crushed us and how we can defeat the next pandemic.”

[iii] 2021, https://www.kwch.com/2021/12/22/pfizer-pill-becomes-1st-us-authorized-home-covid-treatment/.

[iv] 2021, https://www.kwch.com/2021/12/22/pfizer-pill-becomes-1st-us-authorized-home-covid-treatment/.

Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. The information contained within this letter is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any types of securities. Past performance is not a guarantee of future returns. It should not be assumed that diversification protects a portfolio from loss or that the diversification in a portfolio will produce profitable results. The opinions stated herein are as of the date of this letter and are subject to change. The information contained within this letter is compiled from sources Team Hewins believes to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.