Private Wealth

Weekly Research Briefing: New Year. Same Lantern.

January 04, 2022

Happy New Year. So, who didn't get COVID over the break? If you didn't get it directly, I am guessing that it impacted one of your flights, entertainment activities or dining experiences. Even with plans B and C activated, I had a great two- week break. I hope that you did also.

So where do we stand now? Omicron reared its ugly head and may have thrown the holiday plans into the shredder, but as daily scientific data on cases and severity around the world were revealed, the Santa Claus rally fired up all eight cylinders on Santa’s sleigh and took the market for a ride to new all-time highs. The virus may have messed up the timing of plans, but it did not adjust the desire for many to buy goods, get traveling and enjoy the end of the year. As Omicron cases continue to weaken in the weeks ahead, look for more to return to school and work with a combined acceleration in economic activity. The economic appetite is there, we just need that green starter flag to be risen so that we can all let out the clutch.

The inflationary twists and turns will remain, but they will evolve. Higher prices on goods and services have led to investment spending on capacity. This year's dramatic increase in semiconductor equipment spending is a top example. Big spending ramps are occurring across many industries and businesses currently. As new capacity comes online, spiking price moves will normalize, and double and triple orderings will end. I wouldn't go betting that used car prices will jump another 29% in 2022. In fact, I wonder what are the odds that they are a double-digit percentage lower this year? Housing prices will be a question mark for 2022. Right now, the market for housing inventory is low while prices continue to rise. Apartment vacancy rates are also quite low so expect the housing component of the CPI to rise. Labor prices are the $64,000 question. Jobs are plentiful and the availability of labor is very uncertain. Those who want to work should expect to get paid nicely. Meanwhile, millions of other Americans continue to re-evaluate their priorities and may quit for a different job or for no job at all. What a great time to be a senior in high school or college.

Let's take a look at how the year finished out for the public markets and then glance ahead for things to think about as we look for gains and avoid the rocks in 2022.

The Omicron threat was no match for Santa's reindeer as the advance/decline line goes vertical in its last two weeks...

This recent strength obviously sets a healthy tone for a potential January rally.

NYSE Advance Decline Index


On the numbers, 2021 shaped up to be an even better year than 2020...

@elerianm: 2021 was quite a year for financial markets... and it followed a strong (albeit more uneven) 2020 and 2019.

Major Indices

In stacking the Dow Industrials returns shows another predictable gain for the oldest average...

The Dow Jones Industrial Average


For 10th Consecutive Year, Hamilton Lane was named to Pensions & Investments’ “Best Places to Work in Money Management”

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Three words: oat milk latte...

Throw all the commodities into the mix to see some real big moves in 2021.

1 Year Relative Performance


Looking at the U.S. market performances by sector...

With the S&P 500 returning almost 29% for 2021, only four of eleven sectors outperformed the market. Active managers would have created a more difficult ride for themselves if they avoided energy and REITs last year.

S&P 500


Now the S&P 500 total return contributions for 2021...

So, the technology sector provided one-third of the gains on the year. Microsoft alone contributed 10% of the index return.

S&P Dow Jones Indices


2021 returns by factor...

The high beta style factor gets the win due to overweights in technology & energy and an underweight in healthcare.

S&P 500 Equity Factor Returns


Below is a look at the total return of various international markets in 2021 for U.S.-based investors...

Only Canada attempts to near the return of the S&P 500.



Now to look at the best and worst stocks in the S&P 500 for 2021...

Plenty of energy companies on the 'best' list. You knew NVIDIA could show up on the list, but did you think Ford could?

Best Performing Stocks in the S&P 500

COVID seems to run through half of the worst performing list. If COVID ends, will the names become 2022 best performers?

Worst Performing Stocks in the S&P 500

Now a look at COVID in U.S....

Cases hit a new peak, but hospital patients do not, as the severity of Omicron is much weaker. Everything that I read suggests that U.S. cases will peak in January. Now let's hope that a more severe variant does not evolve.

US Covid 19


Ditto for the global COVID datasets...

World Covid Case Trends


We will be hard pressed to land new dots further to the southwest of where we will soon be...

We need to enjoy these best of economic times while also saving for that next rainy day.

US Unemployment and Real Funds Rate

Goldman Sachs

I love this chart showing mortgage loan size versus interest rates...

@lenkiefer: For a while, near record low interest rates were more than offsetting robust house price growth but now the runup in house prices has eclipsed rates despite interest rates that are down more than 1.5 percentage points from this time 2018, monthly pmt up about $100/month

Mortgage payments interest rates and loan size

Now take a close look at this chart of all the household equity built up as home prices have moved higher...

There is a lot of consumer confidence available in this chart.

US Owners Equity in Household Real Estate

A Wealth of Common Sense

So where do the markets go from here?

Great market return years are typically followed by decent market return years. A greedy market today does not often turn into a panicked market tomorrow. It takes a while to wring the greed out.

The bad news is when the S&P 500 gains >25% in a yr, it has never gained more the following yr.
The good news?
That next year can still be pretty darn good. Higher 85% of the time and up a solid 11% on average.
In other words, a "big year" alone isn't reason to expect trouble.

Greater Than 25% Years Are A Good Sign For The Next Year

J.P. Morgan's outlook for U.S. stocks in 2022…

After the last three positive years, I think that we would all be happy to fetch a high single digit return on our U.S. equities.

For the S&P 500, we expect 10%-14% earnings growth in 2022 as trend growth returns and as the Fed begins to raise rates. P/E multiples should contract as this occurs, delivering total returns of 7%-10% including dividends. In other words, another version of 2021 when earnings rose by 36% and P/E multiples fell by 6.1%. If this were to occur, it would be the 16th year out of the last 20 in which stocks outperform bonds, during which time cumulative returns on stocks and bonds have been 697% and 111%, respectively. Increased buybacks and dividends should help; US companies have a lot of spare accumulated cash.


Maybe 2022's attribution bar will be a shorter version of the 2021 bar...

S&P 500 Total Return Attribution


Byron Wien's annual list of surprises for 2022 is out. These three bullets give you a sense of what he thinks is possible for the year...

1. The combination of strong earnings clashes with rising interest rates, resulting in the S&P 500 making no progress in 2022. Value outperforms growth. High volatility continues and there is a correction that approaches, but does not exceed, 20%.
2. The bond market begins to respond to rising inflation and tapering by the Federal Reserve, and the yield on the 10-year Treasury rises to 2.75%. The Fed completes its tapering and raises rates four times in 2022.
3.The price of gold rallies by 20% to a new record high. Despite strong growth in the US, investors seek the perceived safety and inflation hedge of gold amidst rising prices and volatility. Gold reclaims its title as a haven for newly minted billionaires, even as cryptocurrencies continue to gain market share.


Where the S&P 500 metrics stand today...

Only cheap on a relative earnings yield basis which means that stocks are going to have to grind out improved earnings and cash flow to keep us all happy.

S&P 500 valuation measures


As you may recall, P/E multiples up at these levels can create a ceiling for future returns...

Forward P/E and subsequent 5-yr annualized returns


Before we move onto interest rates, a couple of smart money makers sent me this Thomas Hoenig article over the break. It is really worth your time...

Hoenig is no longer at the Fed but his thoughts and pen should be important to all. It has been a while since we have been through a falling asset value banking crisis. Remind your brain cells before you overpay for that next asset.

Importantly, the Fed creates these conditions by creating more and more dollars, or increasing the monetary supply, as the economists say.

As a bank examiner, Hoenig realized another very important thing. Easy money policies don’t just drive up the price of consumer goods, like bread and cars. The money also drives up price of assets like stocks, bonds and real estate. During the 1970s, low interest rates fueled demand for assets, which eventually inflated asset bubbles across the Midwest, including in heavy farming states, such as Kansas and Nebraska, and in the energy-producing state of Oklahoma. When asset prices like this rise quickly, it creates that dreaded thing called an asset bubble.

The self-reinforcing logic of asset bubbles was painfully evident in farming, and it reflected the dynamics that would later play out in the housing bubble and the over-heated asset markets of 2021.

When the Fed kept interest rates low during the 1970s, it encouraged farmers around Kansas City to take on more cheap debt and buy more land. As cheap loans boosted demand for land, it pushed up land prices — something that might be expected to cool off demand.

But the logic of asset bubbles has the opposite effect. Rising land prices actually enticed more people to borrow money and buy yet more land because the borrowers expected the land value to only increase, producing a handsome payoff down the road. Higher prices led to more borrowing, which led to higher prices and more borrowing still. The wheel continued to spin as long as debt was cheap compared to the expected payoff of rising asset prices.

The bankers’ logic followed a similar path. The bankers saw farmland as collateral on the loans, and they believed the collateral would only rise in value. This gave bankers the confidence to keep extending loans because they believed the farmers would be able to repay them as land prices increased. This is how asset bubbles escalate in a loop that intensifies with each rotation, with the reality of today’s higher asset prices driving the value of tomorrow’s asset prices ever higher, increasing the momentum even further.


The 2021 movement in interest rates reminds us that nothing ever moves in a straight line. But that trend higher is interesting...

@hmeisler: Bondaleros. Yield on 10 yr. Still home on the range.

CBOE 10-Year US Treasury Yield Index

And you're often reminded that as yields rise, bonds lose value...

Barron's printed a list of fixed income ideas for you to consider as alternatives to losing money in bonds in 2022. I agree with much of their list and would much prefer to own dividend paying stocks, preferred stocks, MLPs and of course private debt securities.

Impact of a 1% rise in interest rates


Due to the weakness in treasury yields, U.S. stocks still have a sizeable earnings yield advantage over bonds...

Earnings Yield = Dividends + Buybacks.

S&P 500 earnings yield and ten-year US Treasury yield

Goldman Sachs

The USA vs. EAFE stock performance differential remains incredible...

Have U.S. multiples stretched to a point that combined with a recovery bounce in EAFE earnings could mean an end to this 14-year streak?

MSCI EAFE and MSCI USA relative performance


And the U.S. outperformance over Europe is both in value and growth strategies...

US Performance vs Europe


The U.S. outperformance has led to this current EAFE P/E discount...

International Price to earnings discount vs US


If the public markets do not close the valuation gap between the U.S. and Europe, private equity will be happy to do the bidding...

Over the weekend, 3G Capital paid 2x trailing sales for Hunter Douglas which worked out to be a 70%+ premium to the share price.

3G Capital has agreed to buy a majority stake in Dutch window-coverings maker Hunter Douglas NV in a transaction that values the business at about $6.9 billion, expanding beyond its food-and-beverage focus for its first big deal since 2015.

Shares in Hunter Douglas jumped about 70% on Friday after the New York-based investment group said it would buy a 75% stake in the company for 175 euros a share. The offer represents a 73% premium to the company’s closing price Thursday. 3G said the deal had a value of about $7.1 billion including debt.

The acquisition will see 3G push into a new industry having previously blazed a trail through the consumer-goods sector. The private-equity firm had a hand in a number of deals that helped create some of the food-and-drink industry’s biggest names, including AB InBev SA, Kraft Heinz Co. and Burger King parent Restaurant Brands International Inc.

Hunter Douglas was founded by the Sonnenberg family in 1919 and today is one of the world’s biggest makers of blinds and shades for windows, including under the Luxaflex brand. It also sells architectural products like cladding. It has 47 manufacturing and 89 assembly operations in more than 100 countries, and employs about 23,000 people.

For 2020, the company generated sales of $3.54 billion, a 3.9% fall driven by lower product sales.

Following the deal with 3G, which is expected to close in the first quarter of 2022, the Sonnenberg family will hold a 25% stake in the business and David Sonnenberg —currently co-chief executive—will become executive chairman.

“As a private enterprise, Hunter Douglas will have the opportunity to advance and expand our business while preserving the family-led culture,” Mr. Sonnenberg said.


Expect the global M&A boom to continue as access to capital doors remain open and valuation discrepancies remain wide...

Deals worth more than $5.8tn were agreed worldwide this year, according to figures from Refinitiv, a 64 per cent rise from last year and the fastest pace of growth since the mid-1990s. The value of deals was 54 per cent higher than in 2019 before the pandemic.

It marks out 2021 as an exceptionally busy year, even for an industry that has been accelerating for much of the past decade.

Global M&A soars past $5.8tn

Financial Times

That big base in European equities continues to provide a nice backdrop for investors...

Europe 600 Index


If European stocks are not cheap enough for you, go do some work on the U.K. stocks...

Valuation Premium: US vs Eurozone


You might even get a currency kick with the EUR/GBP approaching support as the pound strengthens...

Euro to British Pound


On our side of the Atlantic, Canada (EWC) is at the same price as it was 14 years ago...

MSCI Canada Index


If you want to dig deeper, here are the largest EWC holdings...

So, think banks, railroads and Shopify.

EWC Holdings


Regarding emerging market equities, it is tough to argue with Mohamed El-Erian on this one...

Tweet from @SquawkCNBC

And investors moving to the safety of Chinese government bonds highlights the risk-off environment for Chinese equities...

Trending Down


This is a great chart from Goldman...

Prices since January of 2009. Can financial asset prices continue to run past real economic prices? Especially if we have underinvested in the most basic industries and infrastructure?

Asset Prices

Goldman Sachs

One big area which is going to see less capital expenditures will be energy...

Probably safe to bet on continued high volatility and higher prices for oil and natural gas.

E&P Capex/Cash Flow Plowback Ratio

Credit Suisse

The oil and gas industry isn't the only one seeing underinvestment in capital expenditures...

Collapse in global investment in energy-intensive


At the same time, these old economy industries are beginning to become irrelevant to the S&P 500...

Current S&P 500 Sector Weightings


Value continues to massively underperform growth over the long term. But for how long?

Rising interest rates, inflationary pressures and a tight labor market combined with better valuations elsewhere could tip the balance in 2022.

RLV Index

Goldman Sachs

While I do favor value over growth, I did buy a biotech stock last month for the first time in a long while...

The group has significantly underperformed the market. Interest rates are rising, and the healthcare system is still whacked, but I bet you can find a good name or two with a promising pipeline and solid upside. You might not want to jump unless you can try for 50%+ upside to your target.

SPDR S&P Biotech ETF


Healthcare & drugs didn't perform the best in 2021 with COVID rolling around and disrupting everything, but Pfizer at 10x 2022 earnings and a 2.7% yield continues to be attractive to me...

@TMLTrader: $PFE cleared the descending trend line of its flag. Weekly chart shows a 3 weeks tight add-on pattern with 61.71 standard pivot.

Pfizer Inc

There are now over 330 unicorns galloping around the private markets...

No wonder private equity continues to gather and deploy assets. These are companies that are unavailable to public investors until the day they become public.

Number of startups privately valued at more than $1 billion by year


This ten-year population change chart is very interesting...

Florida has no taxes, the Pacific Northwest has weather and sustainability and Northwest Arkansas gives away free mountain bikes to all new immigrants. Why isn't your region growing its population and how will it impact your local economy? Would you prefer to live in a growing or shrinking region?
@mnolangray: It's wild how much of the US is actively undergoing population decline.

Percent Change in County Popluation


It's a new year so while you are updating your passwords this month, go ahead and add a few more characters to them.

How Safe If Your Password


Best thing I saw over the break. A movie for all. Just give it the Oscar for best picture now...

BELFAST is a poignant story of love, laughter and loss in one boy’s childhood, amid the music and social tumult of the late 1960s.
Directed by Kenneth Branagh
Written by Kenneth Branagh
Starring Caitriona Balfe, Judi Dench, Jamie Dornan, Ciaran Hinds, Jude Hill

BELFAST movie poster

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The author has current equity ownership in: Pfizer Inc. and NVIDIA Corp.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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