Outlook and Observations

What a surprising and wonderful year 2021 was for investors. We don’t know anyone who predicted or expected even close to the two years of returns investors have experienced, with a 28.7% total return of the S&P 500 in 2021, following the 18.7% return in 2020.1 The global pandemic and the subsequent response have changed the investment landscape in new and surprising ways.

Investors face new challenges as they look forward. We believe that the investment landscape has drastically shifted and will continue to morph, making forward thinking and understanding second and third order effects a critical investment skill.

Below we have outlined the issues and challenges we see on the investment horizon. Navigating these and looking forward to the continued change in global economies and markets are our focus for 2022.


Transitory or maybe not so much, inflation is all that is in the headlines. We have had this on our radar as a major issue for investors, as we have been commenting over the last few quarters. Now, it appears we may see higher rates in the future, and a tapering of quantitative stimulus.

Supply chain disruptions are getting fixed slowly but steadily, with shortages abating as a result. Prices of goods seem to finally be peaking and the acceleration of prices slowing. Though we do believe, as we have also written about previously, that goods with high labor input costs and a large portion of industrial commodities, such as copper and aluminum, may see long-term sustained higher rates of inflation. Simply put, inflation should likely abate, and normalize, though at its own pace.

Stock Market Valuations:

It seems every market commentator and pundit have the narrative that the stock market is overvalued. We however have a slightly different perspective. Yes, the market multiple is high historically, but from our perspective, we also have never seen such a concentration of mega cap companies as a percentage of the index.

In addition, as of year-end, approximately 44% of the Russell 2000 companies did not earn a profit and 18% of the Russell 3000 traded at 10X sales.1 There seems to us no question that there are overvaluations in the markets. But we would counter that we also seem to find a lot of cheap securities trading at single digit P/Es, while growing their earnings. That is why, in our opinion, there are still pockets of value in the market.

Some of the recent volatility in our observation, is the rotation from companies of high valuation and long duration, and “story stocks”, back into boring, cheap, cyclical names. We have purposefully positioned our portfolios to hopefully take advantage of this trend. We expect this to continue, though not in a straight line, throughout the year.

The aspect of the equity markets we believe most investors are missing is the inflation story. Earnings are also subject to inflationary effects. Part of the market’s expensiveness is its discounting of future earnings growth. We have had unprecedented stimulus and our economy is recovering as indicated by the barometers of inflation and employment. It seems very reasonable for us to think that future corporate earnings growth will be good and could be drastically underestimated.

% of non-earners back to 2009 peakS&P 500 TTM P/E with long-term average45% of S&P 500 companies yield more than the 10-year treasury note

Bonds and Fixed Income Instruments:

Given the current level of inflation, from our observation, the rate on the entire yield curve for bonds leaves holders of cash and fixed income at a negative real rate of return. With the recent high inflation numbers, it makes the losses impactful, although not noticeable to most investors. Suffice it to say, we believe that unless you are buying fixed income as a function of liability matching, you are losing purchasing power holding any form of cash or fixed income.

The portfolio liquidity and volatility dampening effects of fixed income are why most investors choose or need the fixed income exposure. Bonds are no longer held for income production, as they once were when we started our careers. With yields structurally low, the real value is the dampening effect upon equity portfolios and the ability to reinvest or rebalance in times of market disruption.

We believe this will not end well for holders of long-term maturities; therefore we are limiting our exposure and focusing on short-term fixed income holdings.

Energy Sources and Markets:

There is no doubt that we are transitioning to a higher percentage of power generation from renewable sources. The massive investment and government incentives for solar and wind are leading to the development of new projects in the space and in fossil fuels, natural gas continues to replace coal.

From an electricity generation standpoint, natural gas is essential for spike power or to meet variable demand. We believe it has a long lived and important role in meeting the world’s energy demands, especially as we move to electric powered vehicles. In our opinion, electric vehicles and their continued emergence will drastically change our infrastructure needs.

The transition from fossil fuel as a primary fuel source for the vehicle fleet will require more use of industrial metals such as copper and aluminum. From battery technology to electric motors to a broad electric charging network, we believe industrial metals will experience newfound demand. We believe having exposure and thinking broadly as to the second order effects of this change in consumption due to renewable energies and electric technologies will be critical for investors.

The conventional energy source of crude oil has been politically frowned upon over the last few years. Hence, in our opinion, we have seen inadequate development and replacement of oil reserves. As the transition to electric will be a long-tailed event, oil demand will likely last longer than many expect. We believe there will be pockets of opportunity in fossil fuels and the companies producing them, for thoughtful investors to take advantage of over the intermediate term.

Artificial Intelligence (AI) and Deflation:

We believe AI is in fact here and that it has been for quite some time and its role will simply continue to grow. The productivity and standard of living enhancements are tremendous. The strong deflationary force of technology will continue as a result.

We have had a focus on the beneficiaries of the development and evolution of AI in our investment portfolios. We think the ripple effects will spread wider and have an impact upon all businesses. Though we believe there will be more emerging investment opportunities on the horizon, one of the biggest effects AI will likely have is the containment of inflation in many aspects of our lives.

“Inflation in what”, is the question investors will need to parse as they think through AI’s benefit to the world in advancements and allocations of resources as well as labor productivity. We believe that AI’s effect will be far reaching and require deep thought to take advantage of as investors.


It is so fascinating to see the potential emergence of the Web 3.0 and the Metaverse. We are not sure how all this will develop and what the true potential is. However, we do know luxury brands like Nike, Gucci (Kering), and Louis Vuitton (LVMH) have already sold tens of millions of dollars of branded “products” in the metaverse to people’s avatars.

Now, this purchasing of imaginary goods in an imaginary place is, on the surface, something that may either stun you, or make you chuckle out loud, or maybe even both, but it is a real statement on the power of brands! It is also a statement of the potential future profitability of brands. Being able to sell branded luxury products that have no manufacturing costs is the ultimate capitalist’s dream.

Crypto Currency and Non-Fungible Tokens (NFT’s):

Whether we believe these are investable or not, and you can put us in the same highly skeptical camp as we also are about buying Gucci loafers for our personal online avatars, there is a generation of investors that believe it is an attractive place to invest. The rise of the Millennial as an investing force is beginning to appear in the markets.

There is an old saying in the investment business about long term trends, and that is simply that “demographics are destiny”. From this perspective alone, we could make a case for the sustained activity of our theoretical commodities.

Now we would not personally commit capital here, but then it is rather hard to condemn the generation of investors trading in virtual goods. It will be fascinating to see how it all ends, as a bubble or a sustainable trend for the Millennial generation.

We are humble enough to admit we might be off base with our skepticism. But we are jaded enough to not want to commit our client capital at this point in the cycle.

As we look to 2022 and the years forward, we are excited about many of the opportunities we see. We do believe that this year may bring more volatility than the very low volatility year we just experienced. But we do have strong faith in continued long term returns and economic prosperity for the US, as well as the emerging and developed world.

We are very grateful for the stewardship you have entrusted us with to navigate the changing investment landscape, and eager to meet the challenges that will follow.

John Cheshire
Chief Investment Officer


[1] www.strategasrp.com “Quarterly Review in Charts Mon. Jan 3, 2022”


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