If we have learned anything since the beginning of 2020, it’s that predictions can be tricky. Infectious disease and inflation were not widely predicted in either of the last two years, yet here we sit. Truthfully, the biggest threats we regularly face are things we had not imagined. That’s generally reasonable given predictions are hard to make when something has never happened before or happens so rarely that there is no reliable pattern to interpret from a data set. Our focus at Reliant tends to skew not towards making a long list of predictions for a new year but rather to assessing what current and future risks you as clients face.

Perhaps the most vexing problem in the US economy today is inflation. Now, not many prognosticators are using the term transitory to describe the changes in prices we’ve seen recently. Inflation, at least in the short-term, seems here to stay, and that will undoubtedly affect how the Federal Reserve and other key central banks will act in 2022. The Fed must find the right mix of policy moves to raise interest rates just enough to get inflation under control while not hiking rates so much that it causes damage to the economy, potentially reversing stability they worked hard to ensure after the onset of COVID.

The labor market also continues to move into unprecedented territory. A paradox has emerged between workers being hired at a rapid pace (LinkedIn estimates 1 hiring every 15 seconds) even though job openings remain near a pandemic high, as evidenced by the graph on the right. More than 20 million Americans left their jobs in the second half of 2021, pushing the quit rate to its highest level ever despite employers offering increased pay and benefits. Government stimulus and extra unemployment benefits expired months ago, yet the labor force participation rate has barely budged. We are curious how these shifts in worker habits may affect productivity over the long-term.

Lastly, 2022 is an election year, as if you needed any reminder. The high stakes nature of our politics is unlikely to change in the near term given the razor thin majorities in Congress. And while it may seem that the Republicans are poised to take over one, if not both chambers of Congress, just two years ago it seemed unlikely the amount of political upheaval we’ve experienced would occur. Predictions may be tricky, but we will remain steadfast in managing through the uncertainty markets face.

Energy was the top performing sector in 2021, and we believe there is good reason for the advance to continue in 2022. Demand should improve as travel and commerce continue to recover domestically and internationally, and oil prices seem to have found more relative stability since the middle of last year. In the quarter we added Halliburton, an oilfield service corporation, which is a company that provides services to the oil exploration and production industry. Capital expenditures by oil and gas companies are projected to be higher over the next few years as the industry mounts its recovery from the pandemic, which should in turn lead to a period of increasing profits for Halliburton.

In the industrial sector we added General Motors, the largest auto manufacturer in the US. GM has a well-known portfolio of car brands, such as Chevrolet and Buick, that consumers are willing to pay more for than in the past. The company has also embraced electric and autonomous vehicles through strategic investments that we believe will lead to higher profits despite a lower share of future US car sales. We also added NV5, a company that provides construction management and design technology to the public and private sectors. NV5 derives the majority of its revenue from its infrastructure segment, and we believe the firm stands to benefit greatly from the spending linked to recently passed legislation in Washington.

We decided to sell Sysco during the 4^th quarter as inflationary pressures and restaurant staffing issues are likely to weigh on the company’s near-term profitability. Food costs have risen roughly 3.5% over the last year, and close to 10% of nationwide job openings are in the food service and hospitality industry.

The Fed’s stance for the majority of 2021 was that inflation was mostly transitory. Messaging, however, slowly changed between the 3rd and 4th quarters as they saw inflation becoming more persistent along with continued labor market progress. In December, inflation readings touched their highest in nearly 40 years – with the Consumer Price Index hitting 6.8%. A few days later, the Fed doubled their pace of tapering asset purchases from $15 billion a month to $30 billion a month and signaled a strong likelihood of interest rate hikes in 2022. The new pace of tapering would bring all new asset purchases to a stop by March of 2022 and set the stage for rate hikes shortly thereafter.

Despite very high inflation numbers, the shift to more aggressive messaging by the Fed has led to a flattening of the yield curve. A flattening refers to short-term rates rising faster than long-term over a set period time. Fortunately, this flattening has brought some desperately needed yield to the front end of the yield curve for investors. The flattening of the yield curve and long-term rates staying range bound, despite such high inflation readings, gives us some evidence that the markets believe tighter monetary policy will be successful at managing long term inflation.

How does all of this affect your bond portfolio? We expect this could be a year of heightened volatility with market participants closely watching the Federal Reserve. If the Fed doesn’t hike too quickly, long-term rates could easily move upward into a steepening bond curve. However, if the Fed hikes too much or too quickly, we could see long-term rates move down on restrictive policy dampening longer term growth expectations. The key to bond market decisions in 2022 will not only be determined by continued economic expansion but also the Fed’s reaction to economic events and the perception of the impact those policy moves will have on the economy and markets.

Review your estate plan. Make sure your documents are in order and account for any changes that may have occurred in your life over the last year. Verify you have the proper insurance plans in place – disability, life, homeowners, additional liability, etc. Confirm that your beneficiaries on your retirement accounts, annuities, and life insurance policies are correct and up to date. If necessary, update your will or power of attorney documents. Ensure your assets are titled in line with your estate plan. And lastly, make sure someone you trust has a copy of all the documents in the event something happens such that your wishes may be carried out accordingly.

Review your automatic payments. We all do it. We subscribe and then we stop using a service but forget to cancel the automatic subscription payment. Take a few minutes to review the automatic subscription payments hitting your credit card each month. If you’re no longer using the service or not taking advantage of the full benefit, then cancel the subscription plan and save that money.

Review and optimize your investment accounts. Optimize your accounts and investments by consolidating accounts when and where you can. Did you retire and need to roll your company 401k plan into a rollover IRA? Do you have any “orphan” accounts sitting in old employer plans that need to be rolled out into a rollover IRA? Am I saving enough to meet my financial goals? Can I afford to spend more in retirement than I originally budgeted? Schedule a meeting with Reliant to review your financial position as we head into the new year.

Watch the mail for your tax planning documents. Ok, this isn't really a resolution, more of a reminder! Don’t forget to watch for your 2021 tax documents to arrive during the 1st quarter. Income based tax documents will be issued by the end of January. Other tax documents will be issued throughout February and March. If you made a charitable donation and have not yet received a gift receipt, reach out to the charitable entity and request one.