All posts by Sellwood Consulting

First Quarter 2022 Market Snapshot

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First Quarter 2022: Rising Prices, Rising Rates, Rising Tensions

The stock market’s mild single-digit dip in the first quarter concealed wide swings in bond and commodity markets as investors dealt with the highest inflation readings in 40 years, Russia’s invasion of Ukraine, and a tightening Federal Reserve that increased their number of projected rate hikes for 2022.

After reaching all-time highs in late 2021, equity markets were already reaching correction territory in early 2022 before the Ukrainian invasion pushed equity markets lower and commodity prices sharply higher. Supply chains, already stretched from the impact of the pandemic, took another blow as crude oil prices rose briefly above $120 a barrel. Other commodities were also impacted. With almost a third of the world’s wheat supply coming directly from Russia and Ukraine, prices per bushel doubled in early March before retreating slightly to end the quarter.

The large jump in commodity prices presents another headache for the Federal Reserve, which hiked interest rates for the first time since 2018 and has managed expectations for future hikes upward as inflation has remained persistently elevated. Expectations for higher rates sooner pushed bond yields higher and prices lower, leading to the worst quarter for investment-grade bonds in more than 40 years. The Bloomberg Aggregate, which measures investment-grade US debt, was down 6% in the first quarter while the Bloomberg Long-Term Treasury index was down almost 11%. Correspondingly, mortgage rates surged to the highest level since 2018.

What had been a double-digit loss for world equity markets midway through the quarter turned into a single-digit one as investors piled back into stocks, as well as more speculative bets, late in March to help cut losses. Energy shares were the main source of strength for the quarter, while investors with a value style tilt to their equity investments were also partially protected.

2022 Capital Market Assumptions

 Download our 2022 Capital Market Assumptions White Paper.

Sellwood’s 2022 Capital Market Assumptions portray a more optimistic environment for most asset classes, compared to a year ago.

Investor expectations for inflation are a core building block for both market prices and their prospects for future return. Rising inflation expectations contributed to an increase in our return expectations for most asset classes. Importantly, our assumptions are nominal in nature, so our higher forecasted returns do not necessarily imply higher purchasing power in the future.

Rising inflation expectations pulled fixed income yields higher over the course of 2021. Across the full Treasury yield curve, nominal interest rates for default-free Treasury assets rose by an average of 0.53%. Yields for bonds with modest credit risk rose by a bit more than that as spreads widened. Our forecasts for fixed income return have risen by approximately 0.30%-0.70%, consistent with the slightly higher expected returns offered by markets at the beginning of this year, compared to a year prior.

Equities are more challenging to forecast, and therefore have a wider assumed distribution of outcomes. Our forecasts for stock markets also rose, but by a smaller amount – approximately 0.15%-0.25% per year. This modest increase reflects our expectation that companies benefit, in nominal terms, from higher inflation. Our US equity assumption rose by a bit more than our non-US equity assumption did, partially reflecting that 2021’s performance for the US stock market, while extraordinary, underperformed corporate earnings performance, which was even more extraordinary.

Diversifiers mostly saw increased returns as well, reflecting their partial sensitivity to stock and bond markets. The only exception is real estate: very high recent returns have collapsed REIT yields (cap rates) to historic lows, reducing their expected return.

Fourth Quarter 2021 Market Snapshot

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Fourth Quarter 2021: There Is No Alternative

Global markets shrugged off supply-chain issues, various Covid-19 variants, and higher inflation in the fourth quarter to finish positive for the year, as the bull market that started in the spring of 2020 rolled on. Large-capitalization U.S. stocks continued their dominance as the S&P 500 ticked off 70 all-time highs, the second most highs ever recorded in a single calendar year. Exceptionally strong earnings and record-high profit margins were some of the catalysts for the stock market performance. Another driver can be summed up by the acronym “TINA” – There Is No Alternative. Investors, unexcited by low and rising fixed income yields, have shunned bonds and poured money into equity funds at record levels.

Supply-chain issues wreaked havoc on the world economy as consumers, flush with cash from record stimulus, shifted spending into consumer goods and away from in-person services. The subsequent inflation, initially contained in supply-constrained industries, has now extended to the broader economy. The resulting consumer price increases, the largest in three decades, forced Federal Reserve Chair Powell to ditch the at-best confusing “transitory” tag during his December testimony to Congress. Chair Powell also announced that the Federal Reserve is increasing the pace of bond tapering, paving the way for interest rate hikes as early as spring 2022. With inflation well above target and the unemployment rate at 4.2% in November, the path to rate raises would seem clear – but Chair Powell cited the Omicron variant and millions of U.S. adults that haven’t returned to the labor force as potential challenges for the economy in 2022.

Outside of the US, developed markets were more muted than U.S. indices but they did see double-digit returns for the year. Emerging markets, weighed down heavily by Covid-19 related closures, global supply chain disruptions, and real estate weakness in China, finished down for the year.

Third Quarter 2021 Market Snapshot

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Third Quarter 2021: Dollar Tree Breaks the Buck

After a strong start to the first half of the year, investors turned cautious during the summer as supply constraints, inflation, and the Delta variant impacted global markets. Global equities ended the quarter in roughly the same place they began, but the surface-level stillness hid the churn underneath as large-cap US stocks were once again in favor over small-cap and international shares.

The Delta variant of Covid-19 appeared to soften US economic growth this summer as consumers spent less on meals out, hotels, and airline tickets. What was predicted to be a September boom as offices and schools reopened turned into a muddled mess that looks unlikely to be resolved anytime soon. Demand, which has been buoyed by the enormous fiscal injections over the past 18 months, has remained elevated. Consumers, who have amassed higher savings than any time in recent history, have shifted their spending from services and into consumer goods. The newly purchased goods, however, still need to be manufactured and shipped; a process that has been increasingly difficult as product delays, worker shortages, and sky-high shipping costs hamper all parts of the supply chain. With all the logistical difficulties, even discount retailer Dollar Tree was forced to raise prices above their namesake $1 price point.

How quickly the world can sort out its supply-chain bottlenecks will likely go a long way toward determining whether the higher rates of inflation will be permanent. Federal Reserve Chair Jerome Powell, for his part, has remained steadfast that the higher rate of inflation is “transitory” and in his view, likely to return to normal at some point in 2022. One group that has already returned to normal is Congress, as they once again have begun inter- and intra-party squabbling on yet another contentious vote to lift the debt ceiling. So far, the markets have met the potential technical US default with a collective shrug. Interest rates bounced around before ticking up at the end of the quarter but even still, they hover near historic lows. Bond returns, like equity returns, were roughly flat for the quarter.

Second Quarter 2021 Market Snapshot

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Second Quarter 2021: Inflation, So Hot Right Now

The word of the quarter was “transitory” as investors tried to decipher the root cause behind the highest inflation readings in decades. Despite some dire predictions about the return of stagflation and a 5.0% annualized inflation increase in May, the verdict of the market suggested that inflation may just be transitory. Interest rates and inflation expectations decreased and bonds, which had sold off in the first quarter, rallied back with longer-duration assets gaining the most.

The interest rate decrease in part stemmed from mixed messaging from the Federal Reserve. The Fed, which is now using a new flexible average inflation targeting framework, is trying to strike the right balance of monetary support for the recovering economy while avoiding a repeat of the 2013 taper tantrum, which undermined market stability. Market participants, interpreting updated Federal Open Market Committee projections, expressed some skepticism of the Federal Reserve’s tolerance for future higher inflation.

Meanwhile, even with consumers expecting higher inflation in the coming year, U.S. consumer confidence soared to a fresh pandemic high. The proportion of consumers planning to purchase homes, automobiles, and major appliances all rose in the quarter, which should provide support for the economy in the near term. Home sales have slowed as prices have risen in the year, with the S&P CoreLogic Case-Shiller residential home price index jumping the most in more than three decades. On the employment front, the share of consumers that said jobs are plentiful increased to a 21-year high, and respondents who said jobs were plentiful exceeded the share of those who said they were hard to get by the most since 2000.

The optimistic expectations provided a supportive backdrop for stocks, as virtually all sectors and regions gained in the quarter. The S&P 500 and NASDAQ hit all-time highs and growth shares were the market leaders in the quarter after lagging earlier in the year.

Sellwood Joins Institutional Investing Diversity Cooperative

For a long time, a lack of good data has prevented diverse investment managers from being hired by institutional clients. That’s about to change, due to the efforts of the Institutional Investing Diversity Cooperative, which Sellwood recently joined.

Members of the Cooperative believe that diverse investment teams make better investment decisions, and that including more women and people of color in asset management roles improves portfolios and our greater community.

As a starting point, members of the Cooperative have partnered with eVestment, the industry’s leading investment manager database, to demand greater transparency regarding the diversity within the asset management firms we research and recommend. We expect further partnerships in the future.

Better data is only the first step, but it is a good start.

Several databases of investment manager information are available to institutional consultants. We have written that the amount of investment manager data available for us to review is so vast that it is almost beyond comprehension – thousands of data elements, times tens of thousands of managers. But there is one place where data is sorely lacking – data regarding ethnic and gender diversity of the teams of people who directly manage our clients’ money. Most databases include a field for the gender or ethnicity of the firm’s owner, but not much else. While we care about who owns every investment management firm that we research on behalf of clients, we care just as much about the teams of people who actually manage clients’ assets.

The limited availability of data regarding investment manager diversity is why our industry generates so many searches for “woman-owned” or “minority-owned” investment firms. Using existing databases, a consultant can screen on those ownership fields. But there simply isn’t robust and reliable data to screen for what we and clients care about just as much – the diversity of the team directly responsible for managing the client’s money, as opposed to the recipient of the firm’s profits. Both are important, and we have data on only one.

Why has this diversity data been limited? Because historically, nobody has demanded better data. The Institutional Investing Diversity Cooperative is changing that. The Cooperative now includes 22 investment consulting firms, advising more than $32 trillion of institutional assets, a coalition of institutional asset advisors that will be difficult for investment management firms to ignore. Together, we demand the tools and transparency to better evaluate the diversity of our clients’ money managers. With more robust data, we can do a better job of including more diverse teams in client portfolios.

What doesn’t get measured doesn’t get done. Measurement isn’t everything, but it’s the necessary first step.

First Quarter 2021 Market Snapshot

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First Quarter 2021: Does the Game Have to Stop?

A bland return of 1.4% for a global 60/40 portfolio hid significant churn beneath the surface in the first quarter. Investors turned their attention from work-from-home companies that had soared in 2020 and rotated to shares of companies ready for the re-opening economy. Value-oriented, small-cap, and energy-related investments were particularly strong during the first quarter of 2021. The overall result was a choppy market with elevated volatility.

The retail investing wave that had been building for years broke into the mainstream in January. Aided by easy-to-use online brokers, retail investors, who loosely organized themselves on raucous online forums, helped enact an unprecedented “social squeeze” on the heavily-shorted stock of brick-and-mortar video game retailer GameStop. The investment excitement spilled into other millennial, nostalgia-inducing companies as investors bid up the price of companies like AMC Theaters and BlackBerry to gaudy levels. The rise in share price was short-lived for most, but GameStop rallied again in March, suggesting that there could be more to come from the online retail investing crowd.

The runoff election in Georgia was an inflection point for US Treasurys as yields bounced higher on the promise of additional fiscal stimulus coming from newly elected President Biden and the new Democrat-controlled Senate. Time will tell how much of the recent jump in bond yields is here to stay, but the rise in rates did push the Bloomberg Barclays Aggregate down 3.4% in the first quarter. Bonds with significant duration were hit particularly hard, with the Bloomberg Barclays US Long-Term Treasury Index down 13.5%, after rallying 17.7% in 2020.

2021 Capital Market Assumptions

Note: These assumptions are now outdated. Our current capital market assumptions and our white paper documenting their construction can always be found on our Capital Market Assumptions page.


Sellwood Consulting’s 2021 Capital Market Assumptions contemplate a prospective lower-return environment, caused by last year’s declining yields and expanded valuations.

These 10-year, forward-looking assumptions of asset class return, risk, and correlation are the key input variables for our asset allocation work on behalf of clients.

As a result of these updates, our 2021 forecasted “capital markets line,” depicting opportunities for investment return at varying levels of risk, has shifted downward and steepened. With last year’s unexpected collapse in short-term interest rates, return prospects for safe assets like cash declined substantially, while return prospects for riskier assets like stocks declined by a lesser amount. Our assumptions heavily depend on current market conditions, and low market yields simply don’t offer much in terms of future return. The dotted line represents the capital markets line implied by last year’s assumptions; the solid tan line is this year’s:

An Incredibly Challenging Time to Allocate

The changing shape of the capital markets line paints a frustrating picture for investors with return requirements north of zero. Whereas in the recent past, a 5% return could have been reasonably expected with a balanced portfolio of stocks and bonds, today the landscape is very different. As of the end of the year, cash and high-quality (safe) bonds yielded somewhere between about zero and one percent, and these low yields have pushed valuations for stocks upward, depressing their prospects for future return.

A portfolio that requires a 5% return, today, cannot allocate much of that portfolio to cash or high-quality bonds. A 5% return requirement therefore requires the assumption of a much more volatile portfolio than it did even a few years ago — and specifically, the assumption of much more equity risk, at a time when equity valuations are elevated. Alternatively, maintaining a balanced level of risk implies accepting the likelihood of a lower level of return.

What used to be a reasonable return expectation (5%) for a balanced-risk portfolio is today an unreasonable expectation at the same level of risk. Or alternatively: what used to be an unreasonable level of risk is what is now required to expect the same return.

Diversification helps, and not every market is as challenged in prospective return as US stocks and high-quality bonds. Many assets improve portfolios not so much via expected risk and return as with imperfect correlations of return, which reduces overall portfolio risk. Creativity can go a long way — but the table is set, and it is set for lower returns than we have seen over the last decade.