Set It and Forget It

What will it take to kill this bull market? That's the headline of my colleague Randall Forsyth's column this weekend. Randy notes that for all the tragedy and terrible headlines this year, investors who sat back and didn't complicate their investments did quite well. 

The stock market would have amply rewarded those who closed their eyes and rode out the year in the large-capitalization indexes. For that, they would have been rewarded with a 25.52% total return in the SPDR S&P 500 exchange-traded fund (ticker: SPY) from the beginning of 2021 through Wednesday, according to Morningstar. (We’ll look at ETF returns since that’s how most folks are playing along at home.)

Going outside of the large-capitalization benchmark mostly wasn’t worth the trouble or risk. Small-caps trailed with less than half their big brethren’s return, with a 12.34% year-to-date return on the iShares Russell 2000 ETF (IWM). Venturing abroad didn’t pay either, with the Vanguard FTSE All-World ex-US ETF (VEU) returning just 6.32%. Credit (or blame) less-developed markets; the iShares MSCI Emerging Markets ETF (EEM) suffered a negative 4.87% return, and the iShares MSCI China ETF (MCHI) took a 22.02% hit.

Randy is far less optimistic about the coming year, noting that the end of easy money policies from central bankers will cause plenty of pain, even if we all know it's coming. 

It’s an axiom of finance that a low cost of money pumps up the value of assets. The present value of an investment’s future cash flows goes up as the interest rate to finance that investment goes down. Cheap, abundant capital can justify all manner of wild and wonderful investments, from electric vehicles to stationary bicycles with tablet computers attached to cryptocurrencies of no intrinsic value that can fluctuate 20% over a weekend.

Besides the seemingly never-ending effects of the pandemic, the signal aspect of 2021’s financial markets has been the power of money, conjured and created by central banks. It has accommodated borrowing by governments on a scale never experienced in peacetime and pumped up asset values to records. And it’s having the same effect on the prices of what’s being purchased, which has put inflation at the top of the worry list of the public and politicians.

Next year, some of that process will begin to reverse. Printing less money may slow the process of pumping up prices, but the impact is apt to be uneven. It may well affect prices of securities first, then prices of goods and services. And the way down is likely to be less pleasant than the way up.

You can read the rest of Randy's column here.