Private Wealth

Weekly Research Briefing: Almost Finished

December 14, 2021

Here comes the final stretch of 2021. After the December U.S. Fed’s Federal Open Market Committee (FOMC) meeting happens this week, it will become a ghost town in the financial markets. Investors will continue to focus on the Omicron variant datapoints as they consider how to make money in 2022, while the Fed and other central bankers decide to go after inflation. The market is betting on three Fed Funds hikes in 2022 as job and wage growth look likely to rip higher. As Friday's CPI data showed, goods inflation is hot right now just as we expected given the economy's strength and the ongoing supply chain issues. Next on deck will be how services inflation acts in coming months as rents/housing and discretionary consumer spending prices evolve.

The Omicron COVID variant continues to be a thorn in the news. Possible peaks in South African case numbers are encouraging. There are Omicron surges in Europe and the U.K., but luckily the new variant’s severity continues to be mild with relatively few hospitalizations and almost nil fatalities. Maybe only upcoming Premier League matches will be the most affected by this new strain? And China remains in the news as property developers Evergrande and Kaisa both go into default, but so far there has been little contagion across the property sector (outside of the weekend's 50% dip in Shimao bond prices). China has moved to cut reserve requirements and add liquidity to its financial system, thus causing only a minor shrug in the markets.

With the market looking to hit the cruise control button this week, we can look back on what was a pretty great year for investing. Equites for most developed markets finished with 20%+ gains. Oil and energy stocks posted 50%+ figures. Even REITs threw up a high 30% gain. The credit markets remained solid helping financials to a 30%+ gain. On the flip side, it was tough to make money in treasuries, gold and emerging market equities. Small caps also put up only half the gains of large caps as Apple's market cap approaches $3 trillion. Over in the private equity markets, the returns look even better given the first half returns, which we have detailed below.

This pen is going down until January. Thanks to my growing production team for the help in getting the Weekly Research Briefing to the finish line every Tuesday. Also, thanks to all the readers for their many contributions and feedback. Have a great time off and a happy new year.

We knew it would be a tough inflation read...

Friday's data came in strong and broad as expected but the visual still looks a bit scary.


The Daily Shot

Services prices are much less scary, but for how long?

U.S. Core CPI

Wells Fargo Securities

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

Read the Press Release

This week we will find out more about the Fed's plans to reign in the money supply...

One driver of U.S. inflation has been a rapid growth in the money supply. Eliminating QE should slow this trend.


The Daily Shot

The financial markets are betting on three Fed Funds rate hikes for next year...

Probability of 3 Fed rate hikes in 2022

The Daily Shot

J.P. Morgan believes that the hikes will begin at the June meeting...

In the US, the biggest catalyst for change has been the dramatic tightening in labor markets. With the unemployment rate now expected to fall below 4% in 1H22, we anticipate the Fed will begin tightening in June. At next week’s meeting, Fed guidance is likely to align with this view as it speeds up tapering to see its asset purchases conclude in mid-March. We also now look for the median FOMC forecast to project three hikes next year. While market pricing incorporates an early Fed start, it is not anticipating the cumulative adjustment that lies ahead. We forecast policy rates to rise 175bp by the end of 2023, and see Fed forecasts projecting a return to a neutral stance (2.5%) in 2024 (Figure 3).

J.P. Morgan

US policy rate

Mohamed El-Erian was getting even more forceful on the Sunday morning news shows...

Allianz SE’s Mohamed El-Erian said the Federal Reserve needs to move fast to regain control of the inflation narrative, denouncing Chairman Jerome Powell’s prior assurance that price increases are short-term.

“The characterization of inflation as transitory -- it’s probably the worst inflation call in the history of the Federal Reserve,” El-Erian said on CBS’s “Face the Nation” on Sunday.

“It results in a high probability of a policy mistake,” he said. “So the Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility. Otherwise, it will become a driver of higher inflation expectations that feed off themselves.”


If the Fed really is behind the curve and needs to raise rates more aggressively, below is your historical crib sheet...

Wall St vs. Aggressive Fed: 1969, 1979/1980, 1994, 2018 all were "aggressive Fed” years; total return from a 50-50 credit-stock portfolio was -8.3%, -4.6%, 14.9%, -2.3%, -4.6% respectively in those 5 annual periods (see Table 2); asset market observations in "aggressive Fed" years…yield curve normally flattens, growth outperforms value, pharma & tech most consistent outperformers, telecom most consistent underperformer.

BofA Global Research

Markets & aggressive Fed

Housing prices will continue to see inflation as building material inputs lift-off once more...

U.S. lumber prices are surging again as residential construction accelerates.

CME Lumber Jan22

The Daily Shot

On the deflationary side, commercial office real estate pricing is entering a strange new world...

I have been to the Allstate world headquarters many times in my life. Can't believe that it is going to be erased.

Allstate Corp.’s suburban campus outside Chicago, with its interconnected buildings, manicured grounds and acres of parking, represented a new vision for the U.S. office when it opened in 1967. That vision is now dead.

The insurer reached a deal last month to sell most of the campus. The new owner plans to demolish the office buildings and convert the Northbrook, Ill., site into more than 3 million square feet of e-commerce warehouses and other logistics facilities.

“I didn’t think I would ever live in a world where industrial land is worth more than office land,” said Douglas Kiersey Jr., president of Dermody Properties, which is paying $232 million for the 232-acre parcel. “But here we are.”

The workers who once commuted daily to the Allstate campus, meanwhile, will mostly work from home.

Wall Street Journal

Also, making future space planning difficult is the increasing war for talent which will not end in 2022...

"41% of people that we survey are considering leaving their current employers, and a similar percentage are just thinking about doing something different. And so there's just a massive talent war that's going on." - Microsoft (MSFT) COO Kirk Koenigsbauer

The Transcript

I can't imagine there were many thinking that over a quarter of 2021's trading days would be record highs...

@charliebilello: S&P 500 closes at an all-time high for the 67th time this year. Only 1995 has had more all-time highs in a single calendar year. $SPX

S&P 500 Number of All-Time Highs

And every month of the year posted a record high price for the S&P 500 Index...

@RyanDetrick: Congrats to 2021, as it just joined 2014 as the only two years in history to hit a new all-time high in all 12 months of the year.

2021 Joined 2014 As The Only Years to Have A New High Each Month

It doesn't hurt that stock buybacks have also recovered to record levels...

Companies in the S&P 500 repurchased $234.5 billion in shares during the third quarter, topping the previous record of $223 billion in the fourth quarter of 2018, according to preliminary data from S&P Dow Jones Indices. The wave of share repurchases has helped propel U.S. stock indexes to dozens of records in 2021. The S&P 500 is up 25% this year, notching 67 record closes.

Wall Street Journal

S&P 500 stock buybacks

Now for the flies in the ointment...

As Goldman points out, there is a narrow list of stocks driving most of the capitalization growth in the S&P 500.

Five stocks accounted for 51% of the S&P 500’s return since the end of April. MSFT, GOOGL, AAPL, NVDA and TSLA together account for more than one third (920 bp) of the S&P 500’s 26% YTD return. After contributing over double their starting weight to the index’s return, these stocks now make up 22% of the S&P 500 by market cap, a 4 pp increase from the start of the year (Exhibit 2).

Goldman Sachs

35% of the S&P 500's YTD return

And the average Nasdaq stock can't even see the soles of Apple, Inc.'s shoes...

@bespokeinvest: The average Nasdaq Composite stock is 39% below its 52-week high even though the index is just 3.6% below its 52-week high.

Average Stock Distance

Always insightful to see the risk-adjusted asset returns as we near year end...

Again, look at the REITs. Wow. They moved like semiconductor stocks this year thanks to the non-meltdown in commercial office and retail properties combined with the continued surge in industrial/warehouse and apartment properties.

Market Performance

Goldman Sachs

Also, fun to look at the individual long-term stock performance lists at year end...

Hopefully you have a few of these names still tucked away in your accounts. Thanks again NVDIA.

@charliebilello: The best performing stocks in the S&P 500 over the last 5, 10, 15, and 20 years...

Best Performing Stocks in the S&P 500

Enough about the public markets. There is a much bigger investing world for retail investors to be found in the private markets going forward...

“There's $80 trillion at retail. Total financial assets in the world of about, I think it's $350 trillion and alternatives are just $7 trillion. So we really haven't scratched the surface. And for us, retail, in particular, is really underpenetrated. So if you look at the different categories of investors, of endowments, which are relatively small but very high performing, they're up around 50% alternatives. Pension funds have somewhere between 25% and 30% and retail is 5% or below” - Blackstone (BX) CEO Stephen Schwarzman

The Transcript

And with the most recent private markets fund data now assembled for Q2/2021, let's look at the returns in the largest category: PE Buyouts...

The below Cobalt data gives us a glance into a broad slice of the Q2 performance of PE funds in the buyout segment. The return of +12.36% was over 450 basis points greater than the return of its public market equivalent, the MSCI World Index. As you can see from the chart below, the Q1 results only add to the 25-year string of higher returns of the PE buyout space where $1 invested in 1995 has now grown to $45.94 versus an investment in the MSCI World which has only grown to $7.78. Whoever recently asked, "Is Private Equity Overrated?" should consider firing their data provider, number cruncher and buying a new calculator.

Also, important to highlight that the better PE buyout fund returns are occurring with much less observed volatility than an investment in public equities. You can see at the bottom of the table where PE buyout funds on a quarterly basis generated 165% of the returns of the MSCI World with only 63% of the observed volatility over the 102 quarter analyzed period. Better returns and lower observed risk.

PE Buyouts performance

See endnotes for definitions.

Past performance is not an indicator of future results.

And because the holidays are near and I am feeling very generous, let me also show you the new Q2/2021 results for the PE growth category...

In looking at the below data, you will find:
- For the Q2 2021, PE growth funds returned over 500 basis points better than the MSCI World Index.
- $1 invested into the PE growth space returned $76.46 over 102 quarters of returns versus only $7.78 invested in the MSCI World.
- Over 102 quarters, PE growth funds have generated 189% of the return of the MSCI World with only 81% of the observed volatility.

If you could own the blue line or the orange line, which would you choose? Private equity is not overrated. It was just more difficult for non-institutional investors to invest in until recently. However, the times are changing so more investors can now own the blue line.

PE Growth performance

See endnotes for definitions.

Past performance is not an indicator of future results.

Now some free advice on how to increase your long-term customer retention rate...

If your business is one that touches the end customer and is built on long-term relationships, then here is a costless tip for you on how to increase the value of your enterprise. Often at this time of year, I see the holiday cards and gifts go out to end clients and customers to thank them for their business. And more often than not, the items will be addressed in a way that overlooks the spouse or significant other. Maybe this is caused by all the automation of mail lists from the business to the named client or maybe it is just an unrecognized mistake by the sending company. But if your product or service is one that benefits the couple in the household, then your firm should try to recognize and acknowledge that. Someday the spouse or significant other may outlive the primary relationship and they might reflect on the annual overlook of their being when it comes time to renew that product or service. So, maybe there is a way to intervene in the automation of the mailing lists to resolve this overlook and strengthen a client relationship for the future.

Someone in Peloton marketing is getting the water bottles raised to them for the "Mr. Big" save this weekend...

Tweet from @onepeloton

Finally, if you are having Beatles withdrawals, try this Martin Scorsese directed documentary...

"The Beatles: Get Back" was great. We enjoyed having the Fab Four in our living room for the week of Thanksgiving showing us how the notes and lyrics came together and how the individuals were growing apart. While "Get Back" was mostly about Paul and John, this reel sheds more light into the mind of the guitarist for the band.

He was part of the most famous rock-'n'-roll quartet in history. But George Harrison was much more than just a member of The Beatles. Oscar(R)-winning filmmaker Martin Scorsese presents a refreshing look at the life of the late music legend in this two-part film that won Emmy(R) Awards for Outstanding Directing for Nonfiction Programming and Outstanding Nonfiction Special. Starring: Dhani Harrison, Ringo Starr, Paul McCartney, Yoko Ono, Eric Idle, Terry Gilliam, Eric Clapton, Jackie Stewart (HBO Max)

George Harrison Living In The Material World

Read our CEO Mario Giannini's latest COVID-19 and Market Update as he shares insight on the omicron variant, inflation, and the Build Back Better bill.

Read more


The author has current equity ownership in: NVIDIA Corp.

Corporate Finance/Buyout - Any PM fund that generally takes control position by buying a company.

Growth Equity - Any PM fund that focuses on providing growth capital through an equity investment.

MSCI World Index - The MSCI World Index tracks large and mid-cap equity performance in developed market countries.

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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