Another Banner Year for U.S. Stocks
In defiance of the continuing toll of the COVID-19 virus, 2021 was another year of double-digit returns for both U.S. large- (+28.7%) and small-cap (+14.8%) stocks. This was the third year of double-digit returns for those two sub-asset classes. It wasn’t just mega-cap technology stocks leading the way in 2021, either. The S&P 500 Equal Weighted index is made up of the stocks from the S&P 500 (U.S. large-cap stocks) and applies equal weights to the components, unlike the regular S&P 500 index, which is weighted by market capitalization. The equal-weighted index outperformed the regular index in 2021 by almost a full percentage point. This outperformance shows that the market rally since Spring 2020 now includes more sectors of the U.S. economy, which is good news. The award for best-performing equity sub-asset class goes to U.S. real estate, with the MSCI U.S. REIT index up 43% in 2021. The end of lock-downs and more freedom to move around cities and the country meant that retail, apartments, and self-storage REITs drove returns in the index.
Things were not so good for U.S. core taxable bonds, however. Long-term interest rates finished the year higher than at the beginning of the year. As a result, the Bloomberg U.S. Aggregate Bond index was negative on a total return basis in 2021, only the fourth calendar-year downturn in the index’s 42-year history. The three other negative calendar years were 1994, 1999, and 2013. One bright spot in fixed-income was U.S. high-yield bonds, whose performance is more correlated with equities and ended the year up 5.4%. The performance of foreign equities in 2021 was a mixed bag. Foreign developed stocks (Europe and Japan) finished the year up 11.3%. Foreign emerging stocks were negative (-2.5%), mainly due to a correction in the Chinese stock market and a continuation of lock-downs throughout those countries. Finally, foreign equities faced the headwind of a stronger dollar in 2021.
Inflation is the word
Inflation, including inflation expectations, affects many pricing and spending decisions among securities markets, consumers, and corporations. Inflation has thus muscled its way into the headlines, no small feat considering the continuing struggles with COVID-19. The December 2021 U.S. consumer price index (CPI) reading showed that inflation rose 7% from December 2020, its fastest pace since 1982 and the third straight month of inflation exceeding 6%. The U.S. Federal Reserve has indicated it will be more aggressive in its actions toward taming inflation, with many analysts now expecting a hike in short-term rates in March 2022. Higher interest rates are a headwind for fixed-income and technology stocks as future earnings become less valuable. However, one key market gauge of inflation, the 10-year breakeven rate (the difference between the yields on 10-year Treasury and Treasury Inflation-Indexed bonds), is currently at 2.5%, meaning that longer-term expectations for inflation are much lower. Diversification among your equity and fixed-income holdings will be important given higher prices and interest rates.
Financial Planning Concepts
5 tips to maximize your home insurance
After Hurricane Sally hit the Gulf Coast, many of our friends and neighbors were filing claims on their homeowner’s insurance policies. Unfortunately, a few found that they didn’t have the coverage they thought they had and struggled to settle with the companies. Although Sally was a “mild” hurricane, the damages were real and the coverage a necessity in those circumstances. Following is a quick checklist to help you make sure your coverage is adequate to fully protect one of your most valuable assets.
- Confirm that you have Replacement Cost Value vs. Actual Cash Value coverage. They sound so similar it is easy to get them confused but the differences are dramatic. Replacement Cost Value coverage provides replacement coverage for any damages on the property to restore it to its original state. A water leak that destroys the hardwood floors (one of the most common claims) results in the company covering the full value (less a deductible) to replace the floors. Actual cash value, however, would only cover what the insurance company thinks the floors are CURRENTLY worth; meaning the Replacement Cost less any depreciation. With ACV, you may only receive a fraction of what it would cost to replace the floors. Confirm with your agent that you have RCV.
- Consider wind, hail and earthquake coverage. Especially on the coast, wind and hail are not typically covered under your normal homeowner’s policy. So in the event of a storm, wind damage (like the roof blowing off) may not be covered without the additional coverage. This type of coverage also typically carries a larger deductible than your typical homeowner’s policy. If you have a large wind deductible, make sure you also have the liquidity to pay it if you need it.
- Consider raising your deductible. Raising your deductible from say $1,000 to $2,500 may save you a few hundred dollars in premium each year. However, sometimes a higher deductible doesn’t significantly lower your premium, so it is important to compare. Since you will not file a claim for a small loss, because it could increase the likelihood of a premium increase later, you should set your deductible at an amount that is high but not out of reach for you.
- During large storms, place your claims quickly. If you find yourself in a large storm and a leak develops on the ceiling, don’t wait until the next day to file your claim. The sooner you file, the sooner you will be paid. And while others will wait for the storm to pass, you can file your claim right then and be in the front of the line to get paid sooner.
- Remember that you are not insuring the land. Often when homeowner’s protect the value of their home, they consider the MARKET value if they sold the house. However, that includes the land and you do not need homeowner’s coverage for the land. Insuring the cost to replace the structure could lower your premiums.