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All in all, 2021 was better than 2020, even though we were unable to bid a much-needed farewell to COVID. The virus morphed into different strains as the year progressed, keeping everyone on their toes with masks nearby. The financial markets were caught on a rollercoaster as investors tried to navigate the economic impact of each new outbreak, shifting between mild and recessionary. Inflation returned with a vengeance in 2021 after the Fed was concerned it was gone forever. The test the economy faces in 2022 will be determining whether the unprecedented surge in prices proves to be a temporary result of pandemic-caused supply/demand disruptions or the tip of a longer-lasting wave of high inflation.
2021 was a year of changing themes. The Fed went from “not thinking about thinking about” to “talking about talking about” to “now is the time to speed up” monetary policy over a period of months. Throughout the change in sentiment, the financial markets had difficulty deciding whether an end to monetary stimulus was the right approach. After trying to convince us that “transitory” was appropriate to describe what should have been a temporary blip in prices, the Fed finally retired the word and conceded that current price pressures may take longer to resolve.
The economy appears to be steady as we head into 2022. Economists are expecting at least six percent growth in the fourth quarter of 2021 and near five percent for the year. Despite higher prices and warnings of supply issues, holiday shopping was the strongest in 17 years. The unemployment rate has fallen 2.5 points in a year, down to a low of 4.2 percent. The labor force added over six million jobs this year, bringing the total number of jobs recovered since the pandemic started to 18.5 million, roughly four million shy of the jobs lost. The stock market continued to make new record closes on the expectation the economy will rebound and the Fed will find a way to rein in inflation.
With all the changes this year, Treasury yields finished 2021 considerably higher with little change in the yield curve:
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12/30/2020
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12/30/2021
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Difference
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2-yr Treasury
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0.12
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0.73
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+52bps
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5-yr Treasury
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0.37
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1.28
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+89bps
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10-yr Treasury
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0.92
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1.50
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+58bps
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Yield Curve
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80bps
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77bps
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-3bps
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Strategically for Credit Unions:
It has been said before, but it bears repeating as we head into the new year. Don’t wait for the Fed. Investors are heading into 2022 on the edge of their seats waiting for the Fed to raise rates. The first interest rate increase is not likely to happen until May at the earliest. The probability of the Fed changing its mind is low, but as we saw in 2020, anything can happen! Instead of waiting for yields to move higher, the best bet is stay invested with regular maturities and cash flow coming due that can be reinvested as yields climber higher.
In the meantime, I would like to thank my loyal readers for your support this year and wish you and your families a very happy and healthy 2022.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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