Author: jeffajohnson135


Overview-Slamming on the Brakes:

There was nowhere to hide in 2022 as a diversified 60/40 portfolio had the worst performance since 1937.  Nearly all major asset classes declined sharply.  Stocks had their lowest returns since the Great Financial Crisis of 2008 and the 40-year bond bull market came to an end with the worst bond performance ever.  The reason for the bloodbath is that the era of easy, low-cost money came to an abrupt end.  The pivot from free/easy money (from late 2008 through late 2021) towards more normalized interest rates meant that asset price inflation was displaced by consumer price inflation.  

As the Fed belatedly recognized the error of the “transitory” inflation narrative, they raised short-term interest rates by 4.25% during the course of 2022-the fastest pace since the Volcker era some 40 years ago.  The easy money era was caused by two crises:  The Great Financial Crisis starting in 2008, and the COVID-19 pandemic starting in early 2020.  Central banks around the world reacted to these crises by pushing interest rates to near zero (and even negative rates in Europe and Japan.)  There is little doubt that global coordinated policy responses to the GFC and the pandemic were essential, but hindsight tells us that the response was not sufficiently targeted and it caused serious economic dislocations.  The stimulus over this long 13-year period provided more money than the productive capacity of economy was able to efficiently absorb.  It also encouraged investors to bid up valuation levels and take greater risks to pursue higher returns than what was available from shorter, safer U.S. Treasury bills.  The reality for investors is that strategies that worked from 2009 through 2021 (Fear Of Missing Out-FOMO, There Is No Alternative-TINA and Buy the Dip) no longer worked in 2022.   Hopefully, the current policy to normalize interest rates can be accomplished in a shorter time frame, and without severe economic consequences.

Long-Term Performance and Risk:

The data shown in the table above provides context and perspective related to performance and risk (standard deviation) for both the short-term 2022 performance and longer-term performance. 

Some of the Major Take-Aways

-Bonds, especially long maturity bonds, were crushed and did not provide the historic hedge to offset against equity declines.  Bonds typically hold their value or even provide positive performance when stocks decline.

-Since bonds did not provide the typical ballast to negative stock performance, a typical 60/40 portfolio declined more than -15%.

-U.S. large cap stocks suffered a sharp decline after a decade of outperformance.

-Huge tax loss selling and a rebalancing by pension and sovereign funds moving funds from equities to bonds also contributed to the declines.

As always, recent performance is a poor forecast for the future, and negative 2022 performance is no reason to avoid bonds or stocks in the future.


Although most assets, sectors and stocks declined, there were some winners:

Energy was the only positive sector in 2022.  The Energy Select SPDR-XLE sector fund rose 58%, and Exxon Mobil-XOM rose 88%.  The energy outperformance resulted from a decade of underperformance and under investment.  The lack of investment resulted after oil fell to $26/barrel in 2016, and this exacerbated the boom-bust cycle.  The energy sector had also fallen out of favor as the Environment, Social, and Governance-ESG investment objective avoided “dirty non/green” oil investments.  Solar typically does well when oil prices rise, and First Solar-(FSLR) gained 72%.


The FAANGs (Facebook, Apple, Amazon, Netflix, Google) were multi-year darlings, but they were De-Fanged due to their high valuation and the prospect of slowing growth from a probable recession.  Facebook/Meta-META was down -64% and Netflix-NFLX was down -51%.  More traditional names held up better with Apple-AAPL down -27% and Microsoft-MSFT down -29%.

The Stay At Home winners tumbled as COVID gradually abated.  Peloton-PTON lost -78% as their subscription model for exercise equipment dried up.  Zoom-ZM held up much better, with a decline of -19%.

Meme Stocks seemed to defy gravity in 2021, but crashed back to earth in 2022.  GameStop-GME, the bricks and mortar game seller, was down -50%%.  AMC Entertainment-AMC, the movie theatre chain, was down -85%.

Crypto (additional coverage below) stocks like Bitcoin-BTC-USD also deflated.  Bitcoin is down -76% from its Nov 2021 high.

On a regional basis, the Chinese Large Cap ETF-FXI was down -23%.

Long-Maturity Bonds were a train wreck.  As interest rates rose, bond prices declined, and this caused the total return for the US Treasury 20+ year index to decline -31%.  The unprecedented bond market decline caused diversified 60/40 equity/bond portfolios to experience the worst annual performance since 1937.    

Long-Term Bulls and Bears

The graph above shows Long-Term trends for gains and drawdowns.  Although bull markets can run for years, drawdown can sometimes last for years as well.  The graph also shows periods of high volatility as evidenced by the precipitous decline and rapid recovery as COVID emerged as a risk.  The graph highlights the importance of a long-term horizon.


Inflation was the big story for 2022, and the market reacted strongly to any comments about inflation coming from Fed chair Jerome Powell.  Initially, Powell described inflation as transitory, but it quickly became clear that this was not the case. Inflation had been relatively stable near the Fed’s 2.0% target for a number of years, leading to complacency about potential increases.  However, the annualized Consumer Price Index inflation rate rose from 1.4% at the end of 2020 to 7.0% by the end of 2021, and then to a peak at 9.1% in June 2022. Although prices for energy, cars, and rent have been trending down recently, wage inflation remains high. The strong job market has kept wages high, and there is the potential for sticky wages, particularly in the service sector, to feed through to persistent inflation.  As of now, it is unclear how long it will take for inflation to decline and how low it will go. There is also a question of whether Fed rate increases to combat inflation could potentially trigger a recession.

S&P 500 Large Cap

The graph above shows S&P 500 performance since the pre-pandemic year-end 2019.  After setting an All-Time-High of 4,977 on January 3, the S&P 500 dropped to 3,577 on October 12, a decline of -39%.  Performance has rebounded somewhat since October and the S&P 500 total return was down -18% for the year. 


The graph above shows the market’s valuation based on the Price/Earnings ratio for the S&P 500 index since 1990.  The market was obviously very expensive in the late 90s during the internet frenzy.  The market valuation eventually declined to a very cheap level during the nadir of the 2008 Great Financial Crisis.  The current market valuation has fallen as tech and crypto high-fliers declined precipitously.  P/E ratios do not provide a good market forecast for near-term performance, and history shows that markets can remain overvalued or undervalued for longer than we like or expect.  Nevertheless, PE ratios do provide a good indication of longer-term performance.  A relatively high PE ratio indicates below-average investment returns over the next 5-10 years.  The current PE is near average historic values, and this implies market performance in line with long-term historic levels.  

The graph above shows the market’s valuation based on the Price/Earnings ratio for the S&P 500 index since 1990.  The market was obviously very expensive in the late 90s during the internet frenzy.  The market valuation eventually declined to a very cheap level during the nadir of the 2008 Great Financial Crisis.  The current market valuation has fallen as tech and crypto high-fliers declined precipitously.  P/E ratios do not provide a good market forecast for near-term performance, and history shows that markets can remain overvalued or undervalued for longer than we like or expect.  Nevertheless, PE ratios do provide a good indication of longer-term performance.  A relatively high PE ratio indicates below-average investment returns over the next 5-10 years.  The current PE is near average historic values, and this implies market performance in line with long-term historic levels.  

Market Consensus Outlook for 2023:

The table shown above highlights consensus year-end 2023 forecasts compiled from Wall Street strategists and from various government entities.  FactSet has reviewed strategist accuracy for the 20-year time period from 2002 through 2021 and found the average forecast error was 8.3%.  However, when they excluded volatile years of 2002 and 2008, the average error was 0.8%.  This indicates that the strategist forecasts are valuable most years, but it also indicates that an investor must be prepared for outlier years. 

Although forecasts are sometimes wide of the mark, the consensus data does reflect what is currently priced in the market, and it is a helpful starting point for discerning the fundamental drivers of the markets.  An understanding of the consensus expectation also provides perspective as markets react to unanticipated or surprise developments.  It is notable that the range between the high and low S&P 500 forecasts are particularly wide, and this indicates heightened risk, uncertainty and volatility.

Small Cap Stocks

Small cap stocks have outperformed large cap stocks historically, but they have been laggards in recent years.  Although small caps are more volatile, they are important in a portfolio’s overall asset allocation plan.  Small caps are expected to grow faster than large cap stocks and should provide better longer-term performance.  Small caps have been under-owned and should benefit from increased investor interest.

Foreign Stocks:

International stocks as measured by the MSCI-EAFE index outperformed in the 1970s, the 1980s, the 2000s and in 2022, but have mostly trailed the S&P 500 since the 2008/2009 Great Recession.  International stocks are cheaper than U.S. stocks, and especially cheaper than U.S. large cap stocks, and they should benefit from investors seeking cheaper valuation levels.  They also provide additional diversification benefits. 

Emerging Market Stocks:

Emerging market stocks are another asset class that has trailed in recent years.  Since emerging markets have been a laggard for a number of years, it is easy to ignore them in portfolios.  Nevertheless, it is worth remembering that during the “Lost Decade,” the S&P 500 had a -0.95% annualized loss over 10 years (2000-2009).  During that same time period, the MSCI Emerging Markets index posted a 10.63% annualized gain!  Emerging market stocks are more volatile but offer better growth prospects than developed markets based on a younger population and a growing middle class.  They are cheaper than developed markets, they offer diversification benefits and they look poised for good longer-term performance.


Historic Interest Rates:

As depicted in the graph above, the U.S. Treasury 10-year bond yield peaked at 15.8% in September 1981 as the U.S. battled double-digit inflation.  As inflation subsided, rates have trended lower.  Interestingly, forecasters, including the US Federal Reserve, have consistently projected rising rates.  Historic long-term bond total return performance has been positive until 2021 due to bond price increases as rates declined.  Rates eventually reached an all-time low yield of 0.52% on 3/9/20 as initial COVID fears caused a flight to quality.  Since that time, rates have moved up and performance has been negative. 

Interest Rates Since the Pandemic:

Although interest rates declined for nearly 40 years, the recent bout of inflation has caused the Fed to react by raising short-maturity rates by 4.25% in 2022.  The year began with the U.S. Treasury 10-year bond yield at 1.51%.  Rates then moved up to a 4.24% yield by October 24 due to inflation fears.  Since then, longer-maturity rates have come down to a year-end yield of 3.88% due to a moderation in inflation and recession fears.  The rising rates have caused the UST 20 year + index to fall by an incredible -31%.  Although 2022 was the worst bond market ever, interest rates have moved up and future performance should be better.

Crypto Collapse:

Matt “Fortune favors the brave” Damon, Steph Curry, Gisele Bündchen, LeBron James and others pitched cryptocurrency to the public before a massive implosion.  Kim Kardashian paid a $1.26 million fine for pumping the unregistered token EthereumMax on Instagram while failing to disclose that she was paid $250,000 for her post.  The 2022 Super Bowl was satirically referred to as the “Crypto Bowl” due to numerous cryptocurrency ads, and was reminiscent of the advertising binge during the dot-com bubble of the 1990s. 

The crypto exchange FTX (previously one of the biggest crypto exchanges in the world) declared bankruptcy on November 11.  After revelations of risky, unethical business practices, there was a surge of customer withdrawals.  Meanwhile, FTX had loaned out customer funds and then didn’t have sufficient funds to cover the customer withdrawals.  Sam Bankman-Fried, FTX CEO and founder (and so-called wunderkind), is now charged with eight counts of fraud of “epic proportions.”  He is under house arrest and fitted with a bracelet that monitors his movements.  Unfortunately, investors using the FTX exchange will face a challenging legal battle in attempting to get their crypto deposits back because the bankruptcy process will likely treat their deposits as uncollateralized, unsecured claims.  FTX had been trading far above any fundamental value, so the precipitous decline was no surprise.  Bitcoin, the largest blockchain-based digital asset traded on crypto exchanges, dropped from an all-time high of $68,991 in November 2021 to under $17,000 after the bankruptcy announcement.  Ironically, the NBA’s Miami Heat are playing in the recently renamed FTX Arena.  They are not alone, as the LA Lakers play in the Arena. 

The FTX bankruptcy does not appear to pose systemic risk to the traditional financial system like the so-called “Lehman” moment that helped precipitate the 2008 Great Financial Crisis.  This experience clearly highlights the value of established exchanges like the New York Stock Exchange and the regulatory infrastructure protecting investors.

It still looks too early to invest in cryptocurrency.  Although there were nearly 1,500 IPOs in the late 90s, only a handful are still in business.  Very few investors were savvy or lucky enough to invest in Amazon’s IPO back in the day, and picking a big crypto winner today faces long odds.  Cryptocurrency and blockchain technology have disruptive and transformative potential, but caution still looks warranted for 2023.    

Looking to 2023:

2022 is one for the record books, and it is good to have the year in the rearview mirror.  While investment performance was mostly either bad or very bad, it is important to look forward to 2023.  For most investors with a long-term investment horizon, the future likely offers better potential, especially for bonds and diversified portfolios.  Listed below are various positive and negative investment factors and analysis related to expected future returns.   

Positive Factors:

-The sharp market decline means that stock valuations are now in line with historic levels.  The silver lining for bonds is that bond price losses have resulted in higher yields and the prospect for positive future returns.  

-Household debt levels are in good shape. The household debt-service ratio is lower than at any time prior to the pandemic and cash represents about 25% of total household debt—the highest level since 1970.

-American consumers are flush with more than $1 trillion of stimulus-derived savings and the lowest household debt relative to gross domestic product in two decades. 

-U.S. corporate balance sheets are strong with U.S. corporate debt to after-tax profits as low today as it was in the 1960s.

-Employment is strong but it is a conundrum.  Although a number of economic recession indicators point to recession later in in 2023, the employment situation remains positive.  Typically, the employment conditions deteriorate along with the decline in other economic statistics.  There can be a lag, however, between economic deterioration and rising unemployment so employment conditions may eventually fall as well.

–Corporate earnings surprised to the upside during 2021 and 2022.  Despite recession fears, earnings reported by FactSet increased at a respectable 5.1% in 2022 and revenue growth increased 10.4%.  Earnings growth is seen at 6.4% for 2023 and revenue is expected to grow 4.3%.  There is no doubt that current conditions are clearly being impacted by the economic slowdown.  If inflation remains higher than expected, then broad-based consensus earnings growth could be revised downward.

-The US economy doesn’t appear to have overbuilt inventories or other excesses.

-China is easing their zero-COVID policy controls, and they have announced an end of quarantine requirements for inbound travelers.  The gradual reopening of their economy bodes well for future global economic growth.

Negative Factors:

-Inflation may prove more persistent than the market currently expects, and this could cause the Fed to raise rates higher than currently expected and this could also precipitate a deeper, longer recession.  A December Bloomberg survey of economists currently indicates a 70% chance recession in 2023, and the current bear market may well be associated with an upcoming recession.  There have been 17 bear markets since World War II and the average decline has been -31%.  Of the 17 bear markets, 9 were accompanied by a recession, and the average recessionary market decline was -36%.  Recessions typically see 10-20% earnings decline.  Finally, the Fed’s desired “soft landing” (curbing inflation without sinking the economy) is hard to achieve and historically improbable.   

-Traditional recession indicators point to a recession, especially the “inverted yield curve.”  The bond market moved into an inverted yield curve position in July as short-term Treasury interest rates rose to 2.89%, above the longer-maturity 2.67% U.S. 10-year Treasury Note interest rate.  This inversion of the maturity timeline resulted from the Federal Reserve pushing up short-term interest rates to control inflation while the broader bond market, fearing a recession, pulled down long-term interest rates.  (The yield curve typically has an upward slope with lower short-term rates and higher long rates as investors require a higher rate to compensate for the longer maturity commitment and unanticipated inflation.)  An inverted yield curve preceded the last seven recessions.  As a result, there is heightened concern about a looming recession.

-Although there are numerous recessionary indicators, the market assumes either a soft landing with slow but positive growth, or a short, shallow recession.  This optimistic assessment is driven by a solid job market.  History shows, however, that inflation is slow to be eradicated. 

-After decades of globalization, the norm is now deglobalization as companies seek to insource operations and shorten supply chains.  The net effect is slower economic growth due to less efficiency and lower productivity.

-Decarbonization is now a reality as numerous studies point to the prospect of a future tipping point where there is an irreversible change in the climate system and locking in further global warming.  As a result, there is a necessity for new “cleaner” infrastructure investment, and the reality of higher operating costs.

-Demographic shifts are resulting in an aging population and labor shortages that results in slower growth in developed economies.

-Political developments continue to be a risk.  The Russia/Ukraine war not foreseen last year, but it continues to be a drag on global economic growth.  Iran is unstable with riots.  China’s tensions with Taiwan and Hong Kong are troubling.  North Korea is another threat.  Political events or changes in government policy are often discounted, but they do happen and they negatively impact growth prospects.

-Massive stimulus packages implemented in 2020 and 2021 to battle COVID are now mostly expired.  Consequently, this component of growth is no longer an economic driver.  Meanwhile, there is an argument that the stimulus may have not delivered the kind of longer-term potential growth that many economists expected.

– Stagflation is a key risk facing the global economy as growth continues to slow while inflation remains stubbornly elevated. 

What should you expect in the future?

It is very difficult to accurately predict market performance for the upcoming year, but bond market performance looks positioned to produce positive performance.  History suggests that equity markets will also rebound, and a diversified portfolio will do much better in the coming year.  Longer-term trends are more important for financial health than annual performance and there are industry guidelines to inform your longer-term planning timeline.  Short-term volatility in both directions often leads to poor investment decisions.  During the internet frenzy of the late 90s, it was common to extrapolate huge returns into the future.  Despite these lofty aspirations, it was actually a time when we were heading into a lost decade.  By contrast, the Great Financial Crisis in 2008 caused many to assume the worst and go to cash.  In reality, the ensuing decade generated stellar returns.  Neither of these highly volatile short-term situations were realistic or helpful for future performance.

At this stage in the investment cycle, pessimism is probably the biggest risk for most investors.  It is easy to talk about discipline and a long-term perspective, but it is not easy to implement in either up or down markets.  At the beginning of 2022, some pundits said we are in the midst of the “Roaring 20s”, and others warned of another “Lost Decade.”  The reality is that no one knows for sure, but it is best to position portfolios within a longer-term perspective. 

-For shorter timelines, it is best to stay conservative and avoid risk.

-For longer timelines, it is helpful to consider expected long-term returns. 

Listed below are expected returns for major asset classes:

These long-term asset class returns are compiled by Cornerstone from major asset managers like JP Morgan, Vanguard and others.

It should be noted that these returns are higher than last year due to the fact that the market is much lower, valuations are much cheaper and bond yields are much higher.

After considering the asset class expected long-term performance above, it is helpful to compile these returns into broad-based portfolios based on your overall Investment Objective.

These long-term returns for Investment Objectives ranging from aggressive to conservative are compiled by Cornerstone from major asset managers like JP Morgan, Vanguard and others.

The table above provides guidance for various Investment Objectives related to longer-term performance expectations.  The table allows you to use your personal Investment Objective to show the expected return and risk for your planning purposes for your portfolio. 

It needs to said that market knowledge, discipline and experience all help maintain perspective.  It also helps to keep in mind that markets can move farther and longer then expected in both directions.  Big portfolio winners are likely overweight and expensive, and should be trimmed.  Portfolio losers are likely underweight and consideration should be given to purchases.  As always, a long-term perspective, appropriate Investment Objectives, diversification and rebalancing are more important than chasing last year’s high-flyers.   

Cornerstone exists to provide educational investment information with a Christian perspective.  Some posts are purely about investments (like this one), but other posts have covered stewardship and charitable giving, core values and ESG, Happiness/Money, etc.  This is a unique combination, and Cornerstone continues to evolve.  Your comments are always helpful and are appreciated.

For additional investment and financial planning information see my Cornerstone website

The information provided is for informational and educational purposes and it does not constitute personal investment recommendations or investment advice.  Past performance does not guarantee future performance.

Jeff Johnson, CFA

January 2, 2023


Educational Investment Seminar

I am again hosting an Educational Investment Seminar at Peace Church, Eagan, MN on Friday, March 3rd from 6:30-9pm and Saturday, March 4th from 8:30 am-11:30am. The seminar is suitable for all ages, income levels, and experience levels, and it is ideal for couples. The seminar is strictly educational and nothing is being sold, and it includes a 100+ page course book. There is no fee, but, a confidential free-will offering to Peace Church is welcome. An evening dessert and a morning light brunch will be served. Register online at:


This seminar is designed to help people wherever they are in the investment spectrum-from millennials and other individuals who are just starting, mid-career individuals well into the accumulation phase, retirees seeking advice when they no longer have a paycheck, and High Net Worth individuals with complex investment/planning needs. The seminar is based on my career experience and it attempts to be as objective as possible. The seminar will be tailored to meet the interests of attendees. The seminar is a labor of love and there is no attempt to sell products or build a business. There are also no tax benefits that accrue to me. As part of my work in retirement, I maintain a website that contains additional information at This LLC entity/structure facilitates working with individuals and investment institutions. Jeff Johnson, CFA.

Table of Contents with Section Highlights

SECTION 1: Do It Yourself – DIY, Adviser/Broker, Robo
Getting Started with Investing
Can you do this yourself, do you need to hire an adviser, or what about robo-advisors?
Hypothetical investment returns for DIY, Adviser/Broker and Robo.
Dollar Cost Averaging – DCA.
Fiduciary Standards – Is your adviser a Fiduciary that is looking out for your best interests?
Conflicts of Interest – Examples

SECTION 2: Accumulation and Retirement Stages and Levels
Financial Planning Life Stages.
How does your current situation stack up based on your age and your investment portfolio?
Accumulation and Retirement Guidelines/Mileposts. Fidelity, JP Morgan and other examples.
Social Security – Status and strategies.
Example of the 4% Retirement Rule of Thumb.

SECTION 3: Overview of Major Asset Classes, Index (Passive) and Active Strategies and Investment Products/Types
Stocks, Bonds, Alternative Asset Classes.
Indexing (Passive) and Active Strategies.
Growth & Value Investment Styles.
Index Types
Historic & Expected Future Investment Return and Risk.
Stock and Market Valuation.
Major Investment Products/Types.
Individual Securities, Funds, Annuities and Other Investment Products/Types.

SECTION 4: Asset Allocation, Diversification and Rebalancing
Asset Allocation and Rebalancing examples.

SECTION 5: Investment Objectives, Risk Tolerance and Your Portfolio
Help related to your unique situation and your risk tolerance.
Investment Objectives Worksheet.

SECTION 6: Charitable Giving and Values-Based Impact Investing
Giving-a blessing.
Scripture passages related to charitable giving and investing.
Charitable types-Stock Gifts, Donations from IRA accounts, Donor-Advised Funds, Estate Gifts, etc.
Tax Considerations.
Investing based on your values and high-impact outcomes.

SECTION 7: Investment and Cash Flow Needs
Budget and spending benchmarks & “buckets” for varying investment needs.
Balance sheet example.

SECTION 8: Bitcoin and Meme Stocks
Bitcoin and other cryptocurrency names gained more mainstream acceptance from both retail and institutional investors despite record volatility.
Meme stocks like GameStop skyrocketed in early 2021but came back to earth by year-end.

SECTION 9: Market Outlook
Overview of 2021 markets and outlook for 2022.

SECTION 10: Resources

Jeff Johnson, CFA

February 28, 2022

Cornerstone exists to provide educational investment information with a Christian perspective. Some posts are purely about investments (like this one), but other posts have covered stewardship and charitable giving, core values and ESG, Happiness/Money, etc. This is a unique combination, and Cornerstone continues to evolve. Your comments are always helpful and are appreciated.
For additional investment and financial planning information see my Cornerstone website.
The information provided is for informational and educational purposes and it does not constitute personal investment recommendations or investment advice. Past performance does not guarantee future performance.

Bitcoin, Meme & Inflation in 2021, Wild West in 2022?

While “unprecedented” was the word to describe COVID- plagued 2020, the year 2021 had its own share of unique developments, surprises and disruptions.
Bitcoin and other cryptocurrency names gained more mainstream acceptance from both retail and institutional investors despite record volatility.
Meme stocks became the rage as GameStop started the year by jumping over 2400% by late January as retail investors waged a David vs Goliath battle with hedge funds and other institutional investors.
Inflation: As the year progressed, inflation escalated to levels not seen in nearly 40 years.
Everything Rally– Investor IRA, 401k and taxable accounts advanced nicely as markets provided a third year of big gains.

Wild West in 2022? The developments in 2021 provide an interesting backdrop for the 2022 outlook.


High Level 2022 Market Comments:
The Wall Street consensus remains bullish and sees more market gains for 2022. But, there is a wider-than-normal range between bullish views and bearish views and there is a growing list of naysayers who see more downside.

Inflation is seen by most as moderating and becoming less problematic. This benign view could change rapidly, however, if inflation rises higher or persists longer than expected.

The market expects COVID to go from a pandemic to an endemic that the world learns to live with. This may well be the case, but there is a risk of a variant that is highly transmissible and highly virulent.

Markets have had above-trend growth for over a decade, but inflation has been a surprise and the Federal Reserve has significantly shifted its interest rate policy. The Fed has pivoted from a highly stimulative policy to a tightening policy. This is a major shift from a market tailwind to a headwind and suggests that 2022 could be very different.

Increased retail investor trading is disrupting the market’s traditional institutional structure.

China has unique developing risks including increasing property development defaults and President Xi Jinping’s meddling and control over large Chinese companies.

Investment Portfolio Comments and Recommendations:
Rebalance your portfolio. The big run up in mega-cap stocks in the S&P 500 over the last three years means that portfolios are highly skewed to the largest stocks with the highest valuation levels. Rebalancing back to your strategic investment objective allows the purchase of assets with more attractive valuation levels and prospects for better long-term performance.
Tactically overweight U.S. small caps, value style holdings and developed international. Exercise caution on emerging markets due to China.
Fixed Income bond maturity levels should be kept relatively short, with an emphasis on corporate high-quality and high-yield bonds.
Charitable Giving of highly-appreciated stock is particularly attractive given the big stock market gains and high valuation levels. Obviously, there are few opportunities for tax-loss selling, but negative performers should be liquidated to offset capital gains.
Bitcoin/Crypto has had huge gains but this group is still in the speculative stage. Any purchases should not exceed 1-2% of your portfolio. Blockchain investments look like they have broad long-term applications and appear much more attractive than Bitcoin and other cryptocurrency investments.


Bitcoin/Crypto and the meme craze were two new large market factors, so special attention is provided directly below. Market Outlook details are provided further down.

2021 High Fliers: Bitcoin and Meme:
Powered by social media forums like WallStreetBets, GameStop, AMC Entertainment and others revolutionized the way markets operate.

Bitcoin, Crypto & Blockchain:
Bitcoin and other cryptocurrency assets performance skyrocketed again in 2021 and drew increasing attention from both retail and institutional investors. Although Bitcoin is the oldest and largest “digital currency”, there are literally thousands of cryptocurrencies and new crypto assets are continuing to be developed.

Bitcoin and other cryptocurrency are essentially a software program run across a network of linked but independent computers. As such, Cryptocurrencies don’t have a physical form but instead exist only as entries in an electronic ledger as virtual or digital money that takes the form of tokens or “coins”. The cryptocurrency ecosystem allows you to trade over independent exchanges (like Binance or CoinBase) or transfer assets by having a new line entered into the electronic ledger that indicates the transfer. In this regard, it is like a bank account statement that shows transfers of digital money. Rather than existing in a physical form (coins, currency, credit cards, etc.), however, they remain entirely intangible. New cryptocurrency is developed by so-called “Miners”, high-powered computer users competing to solve complex cryptographic computational math problems to win the latest block in the blockchain database.

Bitcoin was up 60% in 2021, and up 118% annualized over the last five years. For comparison purposes, the S&P 500 index was up 18.5% annualized over the last 5 years. Bitcoin was also very volatile. Over the last five years, the standard deviation for Bitcoin was 89% compared to 15% for the S&P 500. Although Bitcoin is the oldest and most common cryptocurrency, there are numerous other crypto assets with even higher performance and volatility.

Since the cryptocurrency system exists over a network of independent computers, they are decentralized as opposed to the current centralized financial system. The crypto universe provides an anonymous peer-to-peer electronic currency system that is not controlled by any central authority. Consequently, they can’t be controlled by commercial banks or central banks like the U.S. Federal Reserve. Central banks historically have heavily influenced money supply, interest rates and the value of the dollar. The decentralized mode of operation is referred to as Decentralized Finance or DeFi, a catchall phrase for banking services offered on a blockchain-based platform.

Primary Functions and Benefits:
Store of Value: Bitcoin is a currency store of value like gold, and is sometimes called digital gold. Bitcoin was developed with a limit of 21 million bitcoins that can ever be mined. As of 2021, there have been 19 million Bitcoin that have already been mined, so new mining supply will be limited and it will cease in the future. With Bitcoin supply capped at 21 million, there is a scarcity value that presumably protects against inflation and other risks and these factors helps explain the popularity.

Medium of exchange: Crypto provides an alternative to traditional financial services transactions. Theoretically you could buy a pizza, but high transaction costs make it better suited for the purchase of your next Lamborghini. The industry is evolving, and PayPal’s Venmo app and the Cash App from Block (formerly Square) now make it easy to buy cryptocurrency or to send it to others. Retail shopping outlets can be expected to accept some of the most common cryptocurrencies.

Diversifier: Cryptocurrency theoretically provides portfolio diversification benefits because it is expected to have a low correlation with other financial assets. Crypto has an idiosyncratic risk profile that is different from other fundamental factors. As a result, crypto in a portfolio has the potential to offer a more attractive risk/reward profile.

Convenience and Efficiency: Cryptocurrencies offer innovation, cost reduction and even the extension of financial services to underserved populations compared to the legacy financial services industry. Since transactions occur peer-to-peer, there is a vast swath of “middlemen” and administrative layers that are eliminated.

Primary Negative Factors:
Bitcoin and other crypto assets have No Intrinsic Value: They exist as digits in a computer program and don’t generate cash flow like typical stocks and bonds. Traditional examples of assets that don’t generate cash flow include gold, art, baseball cards, classic/exotic cars, beanie babies, etc., but these examples do have a physical presence. Digital assets are seen by some as evolving as a new, separate asset class that generates returns as the price keeps increasing. Critics derisively say that investment gains are based on the Greater Fool Theory (where you need to find a Greater Fool who is willing to pay even more.)

Regulation: Regulation is a huge, complex, multi-faceted issue. The Securities and Exchange Commission, the Department of Treasury, the Federal Reserve, state banking commissions and regulatory authorities across the globe are all considering regulation related to cryptocurrency. A primary objective is to protect investors in a way similar to current investor protections. There is also a major concern related to systemic risk. For example, coordinated central bank intervention was critical for stabilizing the global economy during the Great Financial Crisis and recession in 2008/2009. If cryptocurrency had been part of the global financial structure during that crisis, it is difficult to comprehend how central banks would have functioned. Meanwhile, as regulatory issues are being deliberated, digital currency benefits are being explored by the Federal Reserve and by other countries. Although most countries are considering digital currencies, China has banned Bitcoin and other crypto-related activities.

Volatility: Price movements of +/- 10% in a day have occurred in the past. As mentioned above, traditional measures of risk like standard deviation show risk many times greater than traditional stocks and funds.

Energy consumption: Crypto creation and transactions require immense electricity utilization to power the decentralized computers. Bitcoin’s annual electricity usage is described as nearly equal to Sweden’s. It should be noted that some cryptocurrencies are more energy efficient than Bitcoin, and continued efficiencies are expected. Obviously, cryptocurrency has a large carbon footprint at this time.

Illicit payments: Since cryptocurrency transactions are anonymous, it is used for money laundering, ransomware, sex trafficking, terrorist financing and other illicit uses.

Taxes: The IRS Form 1040 currently asks if you received, sold, exchanged or acquired any financial interest in any virtual currency. Your crypto exchange will send you Form 1099-K if you have more than $20,000 proceeds and 200 transactions, and a copy also goes to the IRS. The IRS is obviously concerned about tax avoidance and additional monitoring can be expected for holding crypto in an exchange or digital wallet.

Blockchain is Most Intriguing:
The decentralized aspect of blockchain has given rise to the term Web 3.0. The Web 3.0 characterization foresees a third-generation internet where decentralization makes the web more transparent, and efficient, and unleashes transformational potential for business, finance and governance.

Parallels to the DotCom Bubble?
Cryptocurrency assets like Bitcoin are hailed as the next big thing by true believers. They are also seen as pure hype by others. One analyst described being bullish on Bitcoin because he was bullish on cognitive dissonance. Charlie Munger (Warren Buffet’s partner) says “This era is even crazier than the dot-com era” when most stocks became worthless. Jamie Dimon, CEO of JP Morgan-the nation’s largest bank, has described Bitcoin in the past as worthless. Given the passion and disparate views, it seems helpful to reflect on the DotCom Bubble. Between 1997 and 1999 there were 1,460 IPOs. was the most noteworthy example of excess. The stock went public at $9 on November 13, 1998, it closed at $63.50 on the first day of trading and by August 2001 it fell below $1 and was delisted. Most IPOs from that era were acquired or merged with other companies or simply ceased to exist. Only 25 reported earnings till 2018 to recover their IPO value according to Shivaram Rajgopal, Professor, Columbia Business School. Today there are very few survivors from that time. (Amazon, Nvidia, Red Hat are prominent survivors). Although there were few survivors, the internet is many orders of magnitude larger today than in 1999.

At this time, it is difficult to foresee the long-term prospects for Bitcoin and a raft of other cryptocurrencies. Newer entrants are emerging with protocols that process more transactions at a faster rate and at a lower cost. The industry continues to develop new products, including stablecoins and Non-Fungible Tokens-NFTs, etc. In any event, the blockchain technology appears to have particularly good growth prospects as the internet evolves. This overview is barely scratching the surface, but the impact from innovation appears huge. Although this space is expected to grow to immense proportions, it looks too early to pick the winners and to be confident you have found the next Amazon.

Retail & Meme:
Retail investors became a new market force that drove the meme stock phenomenon. Meme stock traders use message boards like Reddit’s WallStreetBets, Twitter and other social-media platforms to quickly communicate an investment idea, trend or theme. These meme tactics are in contrast to traditional institutional “fundamental” analysis that is based on company financials and valuation. GameStop-GME, a bricks and mortar video game retailer with declining sales, became the first big meme stock. GameStop traded at under $19 at beginning of the year, but hit an all-time-high of $483 by Jan 28, a 25-fold increase. It ended the year at $148. In January, GameStop benefited from a short squeeze on hedge funds and other institutional investors who were “short” the stock. (A short squeeze occurs when investors utilize an option to sell a security now, with the obligation to buy it at some point in the future. The intent is to be able to buy the stock in the future at a lower price. When a stock price rises instead of falls, the short investors end up buying at higher prices, causing a loss on the option trade.)

Social media platforms allowed retail investors to quickly move together and run in packs to pile on to amplify price moves. This “Stick it to ‘em.” attitude against the big guys caused a short squeeze that inflicted massive hedge fund losses. GameStop investors were encouraged to HOLD FOREVER (or at least for the long-term despite short-term volatility), but an online typo, now immortalized as HODL came to be characterized as “hold on for dear life.”

Social media proved to be effective, and the meme stock traders used the same tactic on AMC Entertainment and others. It needs to be said that once the meme stock phenomenon gained traction, institutional traders and others joined the fray trading on both up and down momentum and various other trend following and quant algorithms.

Since meme stocks usually trade on various non-traditional themes, they typically trade at prices well above what would be justified by traditional valuation metrics. As a result, they require investors to “Hold Forever.” Because these investors can’t cause the stock prices levitate forever, they are ultimately exposed to incurring heavy losses. Meme stocks need to recognized as highly speculative and are best suited for short-term traders rather than as long-term investment strategies. Traders must have the capacity to sustain significant losses. Some investors disparagingly comment on YOLO investors as those who’ve never seen a bear market. Nevertheless, meme stock trading has established itself as a major new force in the markets. It looks clear that this trend represents a new generation of investors developing expertise and learning from potential downside, just like every other generation of investors who were educated by losses.

While Bitcoin, Crypto, Blockchain and Meme stocks generated huge gains, the broader market had an exceptional year as well. Going in to 2021, the consensus expectation was for steady gains, but the reality was a big market “melt-up”. Despite supply chain constraints and COVID persistence, the big gains in 2021 helped major indexes generate their best three-year equity performance since 1999. Long maturity bonds did not have a good year, however. The U.S. Treasury 20 Yr+ long-maturity bond index fell by -4.4%, as it was hurt by rising interest rates.

The data from the table above provide context and perspective, especially related to longer-term performance and risk as measured by the standard deviation. As always, recent performance is a poor forecast for the future.

Within the overall market, big cap U.S. stocks, as measured by the S&P 500 index shown in the graph below, maintained their performance leadership and foreign stocks continued to lag. Energy, previously oversold and unloved, was the strongest sector. Investors saw past under-investment in the oil and gas sectors as leading to higher short-term oil prices. Utilities were the weakest sector, but they still managed to gain a very respectable 18%.

Market activity was robust in other parts of the investment universe as well. Investor fervor led to record investments in Initial Public Offerings and SPACs (Special-Purpose Acquisition Companies). Analysis by Bank of America showed that 70% of IPOs for the year through November were unprofitable, a higher level than during the late 1990s tech bubble.

Mergers and Acquisitions deals also set records, with global volume at $5.8 trillion and U.S. volume at $2.5 trillion. Accommodative monetary policy kept interest rates low, and the low rates fueled easy availability of cheap financing and booming stock markets.

Finally, private equity set a record of $990 billion of deals according to Dealogic. Valuation levels are described as more than twice historic levels.

At this time, most everything has been up and to the right. Market momentum appears solid on a near-term basis, but overall growth rates have been well above long-term sustainable levels. Optimism looks overdone and needs to be tempered by sustainable longer-term fundamentals. It is difficult to call the timing of a bear market, but future returns will likely be much lower than the recent past.

Market Consensus Outlook for 2022:

The table above highlights consensus year-end 2022 expectations for the S&P 500, GDP growth, inflation and the 10 Year U.S. Treasury note. The consensus shows continuing economic recovery, moderating inflation and rising interest rates. Although forecasts are often wide of the mark, the consensus data does reflect what is priced in the market, and it is a helpful starting point for discerning drivers of the markets. An understanding of the consensus expectation also provides perspective as markets react to unanticipated or surprise developments. It is notable that the range between the high and low S&P 500 forecasts are particularly wide, and this indicates heightened risk, uncertainty and volatility. FactSet analysis going back to 2003 shows the consensus typically overestimates year-end market performance, but the consensus has reasonable accuracy most years.

The biggest surprise of 2021 was inflation. The annualized Consumer Price Index inflation rate was 1.4% at year-end 2020, but it rose sharply to 6.8% overall and 4.9% core (net food and energy) during 2021. Increasing inflation began ramping up as the massive container ship Ever Given got stuck sideways in the Suez Canal in March for six days and blocked a key global shipping artery. This event foreshadowed supply chain woes that resulted in an extraordinary surge in global prices, and these constraints aren’t expected to be resolved until well into 2022. Gradually, this “goods” inflation began seeping into the services sector. At this point, inflation has spread into more persistent sectors like wages and rent and there is growing concern related to a wage-price spiral.

The Federal Reserve’s so-called “Dot Plot” forecast shows core inflation dropping to 2.7% by YE 2022 and 2.3% by YE 2023. The Market consensus expectation is higher than the Fed with a 3.5% 2022 inflation rate, and a high-end rate of 5.2% by Wells Fargo. Inflation is clearly running hotter than seen in decades, and the market is currently expecting a gradual moderation in interest rates. History says that moderate inflation rates are not too problematic because inflation allows companies to raise prices and enhance profitability. History also shows that stocks have not been hurt too badly except when inflation is above 6% or when it is negative. Hopefully, inflation will trend down, but vigilance is essential related to the possibility of higher inflation over a longer time period.

According to most valuation measures, equities have been extremely overvalued for several years. The graph below shows the S&P 500 trading at a relatively expensive forward Price/Earnings ratio of 22. Although the market is quite expensive, at least it is not as expensive as the late 90s internet frenzy. PE ratios do not provide a good market forecast for near-term performance, and history shows that markets can remain overvalued or undervalued for longer than we like or expect. Nevertheless, PE ratios do provide a good indication of longer-term performance. A relatively high PE ratio indicates below-average investment returns over the next 5-10 years.

Small Cap Stocks:
Small cap stocks have outperformed large cap stocks historically, but they have been laggards in recent years. Although small caps are more volatile, they are important in a portfolio’s overall asset allocation plan. Small caps are expected to grow faster than large cap stocks and should provide better performance. Small caps have been under-owned and should benefit from increased investor interest.

Foreign Stocks:
International stocks outperformed in the 1970s, 1980s, and the 2000s, but have trailed the S&P 500 since the 2008/2009 Great Recession. International stocks are cheaper than U.S. stocks, and they are especially cheaper than U.S. large cap growth stocks. They should benefit from investors seeking cheaper valuation levels.

Emerging Market Stocks:
Emerging Mkts: Emerging market stocks are another asset class that has trailed in recent years. Emerging market stocks are more volatile but offer better growth prospects than developed markets based on a younger population and a growing middle class. they are cheaper than developed markets, they offer diversification benefits and they look poised for good longer-term performance.

China is currently a risk to emerging markets because it represents roughly a third of emerging market indexes, and because it has country-specific issues. First, the Evergrande property development company has defaulted on bonds, and additional property development companies are expected to default in the future. Real estate development has been a key Chinese growth driver, but this sector is overbuilt and over-levered, and it will be a drag on future growth. President Xi Jinping has also led a crackdown on technology giants like Ant Group, on private businesses in the education sector and on cryptocurrencies. Xi Jinping is pursuing a common prosperity objective, but he is stifling entrepreneurial innovation. The iShares MSCI EM ex China-EMXC ETF has a Morningstar analyst Gold rating that is a way to invest in emerging markets without Chinese exposure.


Historic Interest Rates:
Interest rates have been trending lower since the early 1980s. The 10-year U.S. Treasury bond interest rate peaked at 15.82% in September 1981 as the U.S. battled double-digit inflation. As inflation subsided, rates have trended lower. Interestingly, forecasters, including the US Federal Reserve, have consistently projected rising rates. Historic long-term bond total return performance has been high due to bond price increases as rates declined. With interest rates at current low levels, there is little potential for additional bond price gains. Instead, any increase in yields will negatively impact bond prices and will be a drag on total return performance. If inflation picks up faster than expected, then longer-maturity bonds will experience significant negative performance.

Interest Rates Since the Pandemic:
The 10-year US Treasury bond began 2021 with a 0.92% yield and ended the year at 1.51%. The rising interest rate environment caused 10-year Treasury Bond price to decline and cause negative total return performance. At this time, real yields (nominal yield net inflation) continue to be negative. Fed policy is to raise short-term rates on securities like the 90-day Treasury Bills, probably starting in mid-year 2022. On the positive side, high-yield corporate bonds generated a 5.3% total return. These high yield bonds have higher yields and shorter maturities that are less impacted by rising interest rates. Looking forward, longer-maturity bonds are expected to face higher interest rates that will further erode their bond price and result in another year of negative total return performance. Since the economy remains strong, high-quality and high-yield corporate bonds again look poised to generate positive returns.

Wrapping Up:
Investment performance has been very strong in recent years, and your IRA, 401k and taxable holdings are likely up significantly. After the huge market decline during the Great Recession a dozen years ago, many pessimistically commented about their “201k” holdings. After a decade of above-average returns and optimism, it might be more realistic to temper optimism by picturing “601k” holdings. Markets will eventually mean revert back to a more fundamentally driven 401k valuation level.

At this stage in the investment cycle, overconfidence is probably the biggest risk for most investors. It is easy to talk about discipline and a long-term perspective, but it is not easy to implement in either up or down markets. Some pundits say we are in the midst of the “Roaring 20s”, and some warn of another “Lost Decade.” The reality is that no one knows for sure. Market knowledge and experience helps maintain perspective, and it also helps to keep in mind that markets can move farther and longer then expected in both directions. Big portfolio winners are likely overweight and expensive, and should be trimmed. If you want to buy Bitcoin or meme stocks, keep the weight below 2%. As always, a long-term perspective, appropriate Investment Objectives, diversification and rebalancing are more important than chasing last year’s high-flyers.

Jeff Johnson, CFA
January 6, 2022

Cornerstone exists to provide educational investment information with a Christian perspective. Some posts are purely about investments (like this one), but other posts have covered stewardship and charitable giving, core values and ESG, Happiness/Money, etc. This is a unique combination, and Cornerstone continues to evolve. Your comments are always helpful and are appreciated.

For additional investment and financial planning information see my Cornerstone website.
The information provided is for informational and educational purposes and it does not constitute personal investment recommendations or investment advice. Past performance does not guarantee future performance.

I Bonds Offer a 7.12% Yield and Inflation Protection

Tired of earning 0.01% in your checking account and money market fund?  For most of the last 10 years higher returns with low risk have been a bridge too far.  Well, how about a safe 7.12%?  The recent jump in inflation means that the current interest rate on I Bonds issued by the U.S. Treasury has been adjusted upward to 7.12%. 

I Bonds are not as exciting as Bitcoin or GameStop, but you will likely sleep better at night.


-I Bonds are officially called Series I Savings Bonds, and they offer a guarantee from the U.S. government that you can recover your original investment plus inflation increases based on the Consumer Price Index. 

-I Bonds have been available since 1998, and they have offered good inflation-adjusted returns during periods from the 1990s through the mid 2000s.  Investment return performance has been weak, however, over the last decade as the inflation rate remained under 2%.  In cases where inflation is negative, the return is zero for that period and the principal does not decline. This actually happened in 2009 during the Great Recession when inflation was negative and the I Bond return was 0%.  The recent jump in inflation has now made these investments attractive again.

-I Bonds can be considered a very competitive “parking place” for “near cash”, but you can also hold them for up to 30 years. 

-I Bonds can be bought up to the last day of any month and the investor still receives the full interest payment for that month.

Inflation Adjustments:  The current interest rate for I Bonds is 7.12% (for December 2021 through May 2022), and then it is adjusted every six months based on the inflation rate at that time.  My Cornerstone inflation expectation is for a gradual reduction in the inflation rate, and a lower inflation rate translates into a lower I Bond return.  Nevertheless, I expect an I Bond investment would significantly beat your bank rate for the next couple years.

Rates are moving up, but … The Federal Reserve announced on Wednesday that they will be raising rates, but don’t expect anything big anytime soon.  The Fed’s current “Dot Plot” forecast signals three interest rate increases between June 2022 and the end of next year.  The forecast also sees three additional rate increases in 2023 and three more rate increases in 2024.  Based on this forecast, short-term interest rates would be around 2.25% by yearend 2024.  Although short-term interest rates will slowly rise, these rate increases will rise even more slowly for your deposits in your checking and money market funds.  Banks are always very quick to raise rates on loans, but they will delay raising your deposit rates as long as possible.  Hey, they are in a competitive business to make a profit and meet shareholder expectations.  They have also learned that you will tolerate these low deposit rates because you have had little recourse in the past.  It needs to be remembered that your investment portfolio likely holds banks and you will benefit from stronger investment performance. 

The maximum annual investment is $10,000 per social security number (plus up to $5,000 more if you elect to receive your federal tax refund in I bonds).  If you have kids, you can set up accounts for them as well.  So, if funds are available, a married couple could put in a total of $20,000 before the end of 2021 and then another $20,000 in 2022.  You could do the same for kids. 

You can’t get this from you Adviser/Broker:  Although it would be convenient to purchase I Bonds through your existing advisory or brokerage accounts, you need to set up an account with the U.S. Treasury.  I Bonds are purchased via the website, and it is set up to pull cash from your checking account. There is no charge of any kind at any point. The Treasury website is very intuitive and it is designed to easily walk you through the process.

Liquidity:  The I Bonds cannot be liquidated for one year after purchase.  They can be redeemed between one and five years but you must forfeit 3 months of accrued interest.  After five years they can be liquidated without penalty.

Taxes:  You have the option of paying your federal taxes on an annual accrual or you can wait until maturity to pay the whole tax obligation.  Like other U.S. Treasury securities, there is no state or local tax.  If you use your income tax refund to purchase U.S. savings bonds, complete and file IRS Form 8888 with your tax return.  They can also be used without taxation under some conditions for educational expenses. 

The graph below shows the current upward move in inflation and the history going back to 1971. 

Jeff Johnson, CFA

December 18, 2021

Cornerstone exists to provide educational investment information with a Christian perspective.  Some posts are purely about investments (like this one), but other posts have covered stewardship and charitable giving, core values and ESG, Happiness/Money, etc.  This is a unique combination, and Cornerstone continues to evolve.  Your comments are always helpful and are appreciated. 


0.01% At the Bank? Some Alternatives Oct 24, 2020

2020 Mid Year-Clorox, Zoom, FOMO and More-July 9, 2020

Why So Volatile-April 2020

One for the Record Books-March 14, 2020

Coronavirus Comments-March 1, 2020

Big 2019, 30 Yrs of Ups & Downs, Outlook/Recommendation, January 9, 2020

Charitable Giving Update and Comparisons-2019, October 26, 2019

Market Record, Panic, New Record-What’s Next? July 13, 2019

Educational Investment Seminar-Take Aways.  May 22, 2019

A Wild Year, A Great Decade and a Market/Economic Disconnect.  January 3, 2019

Investments:  Faith-Based & Environmental, Social and Governance.  November 9, 2018

Investment Guidelines 101-(Are Financial Advisers Worth It?).  June 22, 2018

Paul, Apostle of Christ and Economic Priorities.  April 2018

Charitable Contributions.  January 13, 2018

Happiness and Money

Bill Clinton’s 1992 campaign mantra proclaimed:  “It’s the economy, stupid.”  Granted he was trying to win the presidency, but if his statement was true, then the current strong economy and stock market should make us all happy.  Right?  After all, the economy and current euphoric stock market bodes well for retirement accounts, educational funding opportunities, bucket list items, and the chance for once-in-a-lifetime dreams to come true.  And yet, it is often said that money can’t buy happiness.  The U.S. has gotten a lot richer but it hasn’t necessarily gotten happier by many measures.

Obviously, the relationship between happiness and money is not simple and there are many dimensions.

Money and happiness were linked in Franklin Roosevelt’s campaign theme song “Happy Days are Here Again.”  In the 60s the Beatles sang “Can’t Buy me Love.”  Pharrell Williams sang Happy in 2014 and TikTok now offers Be Happy by Dixie D’amelio.  Whatever the age, happiness is big and so is money.

Happiness and money (or the lack of money) are often interrelated and entangled

Money is easy to measure, but happiness from money is much harder to value.  You can easily look at your online brokerage statement and see everything from a high-level summary to great detail.  Depending on markets, this review elicits either a happy or an unhappy gut reaction.  (When markets are down sharply, people often don’t even want to look at the statements.)  Although Fidelity, Schwab and other investment websites provide great “money” detail, don’t expect an online tab or section anytime soon that calculates you your happiness value.  Without a doubt, happiness from money is far more complicated and nuanced.

Happiness can be defined as an emotional state that includes gladness, pleasure, felicity, a feeling of good fortune and possessing what you desire.  It tends to be externally triggered based on other people, things, thoughts and perceptions, and it is often transitory.  Happiness is sometimes described as joy, but joy can be differentiated from happiness based on a deeper sense of grace, gratitude, hope and contentment with who you are.  Psychologists often attach a sense of emotional and physical wellbeing to the definition of happiness.

However you define it, Amazon offers plenty of plenty of books on money and happiness.

We value and strive for more of both happiness and money

America’s founders enshrined the concept of happiness in the Declaration of Independence:  “We hold these truths to be self-evident that all men are created equal  … with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.  Earlier drafts included the right to own property, but property was ultimately dropped because it was seen as redundant to liberty and the pursuit of happiness.

A current indication of the popularity of happiness is a Yale class called the Science of Well-Being. This class, the most popular course in Yale’s 320-year history, is taught by Laurie Santos, a psychology professor whose lectures attract nearly a quarter of the Yale student body.  If you are interested see Yale Happiness Class

Positive Psychology is another happiness development.  Positive psychology is the scientific study of what goes right in life.  Psychology historically held a clinical focus on human problems and how to remedy them.  It looked at weaknesses and shortcomings, including depression, despair and disorder.  Positive psychology was popularized by psychology professor Martin Seligman, a leading happiness researcher.  Positive psychology examines how individuals can create full and healthy lives.  It doesn’t deny the valleys, and it recognizes that life entails more than avoiding or undoing problems, but it recognizes positive life events as a significant part of the human condition.   A positive psychology perspective is helpful when thinking of happiness and money.

Market traders and investment pundits on the Bloomberg Market and the CNBC cable channels give real-time examples of happiness/unhappiness and money.  Frantic and panicked are words that describe the tone on big down days.  Raw base instincts are laid bare.  Big smiles, complacency, hubris and overconfidence are on display on big up moves.  (Oftentimes you can have the audio turned off and you can tell big market moves from facial expressions.)  You may wonder where are the grown-ups.  The reality is that money and happiness are amped up to the max in these circumstances.  For individuals, money (as expressed through the markets) also generates both happiness and unhappiness.  Down markets contribute to insecurity or a fear of an inadequate retirement or shortfalls related to other investment goals.  Although down markets elicit concern, up markets don’t cause individuals to say their investments are too high or too much.  It is clear that too little money causes unhappiness, but it is less clear that more money causes more happiness.

A widely cited 2010 study found that the relationship between happiness and income plateaus once you earn $75,000  (Nearly $90,000 in 2021 dollars)

This study, by Nobel Prize winners Daniel Kahneman and Angus Deaton, showed that poverty, (including insufficient education and inadequate healthcare,) causes distress and unhappiness.  That is no surprise.  When these basic needs are met, however, the benefits of additional income rapidly diminish.  A common explanation for why money doesn’t buy happiness can be described by the term psychological homeostasis.  Psychological homeostasis, among other things, describes the human tendency to get used to circumstances quickly, both positive and negative.

Another study conducted by psychologists Sonja Lyubomirsky, David Lykken and Auke Tellegen found that the way our brains internally process our circumstances is more significant than external factors.  Their research found that external factors like income and investment levels account for about 10% of long-term happiness.

Subsequent research has further refined the association between money and happiness.  Research completed in 2020 by Jean Twenge, a psychology professor at San Diego State University and Matthew A. Killingsworth, a happiness researcher and senior fellow at the University of Pennsylvania’s Wharton School of Business, shows that happiness continues to increase for high-income earners.  Their 2020 study says that the earlier “$75,000 happiness plateau” thesis was misunderstood.  Killingsworth said the original study was for a specific kind of happiness:  emotional well-being that encompasses day-to-day experiences and feelings.  When looking more broadly, however, they found longer-term life evaluation continues to be positively impacted by money.

Economic analysis of lower income families shows a clear relationship between happiness (and unhappiness) and sufficient (insufficient) money for necessities.  Adequate income allows getting enough to eat, a roof over your head and the wherewithal to take your kid to the doctor.   Within that context, relieving poverty is a major driver of increased happiness.

These studies and research have some latitude for a range of interpretations, but they do point to a relationship between money and a longer-term sense of life satisfaction, contentment and well-being.

Money allows for enriched experiences

Although money can’t generally buy sustained happiness, it can offer big benefits if used as a tool to enrichen lives.

It provides for educational opportunities, and education strongly correlates with future happiness.  With more education, people are more likely to be able to do the things that give their life purpose.  For example, it allows travel to experience different cultures.

It provides improved healthcare, which allows longer productive lives while reducing pain and suffering.

It allows charitable gifts to lift up worthy causes.  There is a high correlation between charitable giving and happiness.  Giving allows the potential for great transformation, and this can provide immense joy.  By contrast, psychologists report that self-centeredness and self-absorption tend to lead to stress behaviors, isolation and unhappiness.

It provides the potential better use of our time, according to researchers at Harvard Business School.  While increasing wealth can produce an unintended consequence of a rising sense of time scarcity, money spent to purchase time-saving services can enhance happiness and life satisfaction.  By eliminating tedious, humdrum activities, people are free to pursue their passions.

In short, greater financial resources allows people the freedom to flourish.  Meanwhile, a lack of money precludes these benefits.

The Downside

While money can be a beneficial tool, it should not be an end to itself.  There is a danger that our personal identity can be wrapped up by the amount of money we make and how much we possess.  It becomes a shallow point of pride.  If we are driven to simply accumulate it, we can lose sight of the purpose of money.  It has been described as collecting hammers instead of building a house.  We can also succumb to messages and images that entice us to pursue something more or better.  Our culture induces dissatisfaction with who we are and what we have as it drives desires for a new car, a bigger house or a work promotion.  These messages make it difficult to be content with yourself, your family, your work and with your possessions.

There can also be an unhealthy personal association or attachment related to money.  Examples include an excessive need for safety, secrecy, control, pride, power, weakness, virtue, vice, envy, regret, etc.  Moreover, shame can result from feelings of how much or little you have, and how well or poorly you spend it and even your perception of self-worth.  These dysfunctional attachments and associations typically go back to our upbringing and our culture, and they are hard to overcome.  Finally, money and spending priorities are known stressors in marital and other relationships.

Winning the Lottery Is No Curse

Lotteries provide an interesting case where a winner is instantaneously morphed from low/middle income in a “life-changing” transformation to great wealth.  This phenomenon is much different than wealth derived by an entrepreneur founding a successful company or the receipt of a large inheritance.  Media portrayals of lottery winners show ecstatic people basking in their sudden, newfound wealth.  Lottery winners are quite newsworthy and considered “good tv”, and there is a common narrative that winners will blow it and declare bankruptcy.  Popular accounts and anecdotes abound that say that winning the lottery brings bad luck and that all that money makes people miserable later in life.

Contrary to common stereotypes, academic studies find far different outcomes.  A study, published by the National Bureau of Economic Research, by New York University economics professor Daniel Cesarini and his fellow researchers found that lottery winners retained their wealth well over a decade after their big win.  They found that winners that quickly squander their wealth are rare.  In most cases, they saw that people worked a little less, and that they spent their money prudently.  They also found that people who win large sums of money do cut down on work but it’s quite rare for them to quit altogether. They cut back mostly in the form of taking longer vacations.  The study found “Large-prize winners experience sustained increases in overall life satisfaction that persist for over a decade and show no evidence of dissipating with time.”  In other research, University of Michigan economic professors Justin Wolfers and Betsey Stevenson documented that lottery winners have higher life satisfaction.  The relationship between income and satisfaction is remarkably similar across dozens of countries.

It needs to be acknowledged that research on lottery winners is difficult and complicated.  Results are often found by surveying winners, and self-reported data suffers from low quality.  In addition, lottery winners are under no compulsion to report their income and tax records to researchers.  Finally, research is biased by the fact that cases of financial ruin are more frequently publicized than cases of stability.  Another complicating factor is the reality that many lottery winners choose to remain anonymous.

Although rags-to-riches stories are popular fare and make interesting reading, it should be noted that low-income groups have higher participation rates, and many social policy advocates view lotteries as a regressive tax.  Lotteries have been disparagingly referred to as a stupidity tax.

Religious Faith & Biblical Perspective.

The Bible dedicates numerous passages of scripture to money and the use of money.  In general, the Bible doesn’t necessarily condemn wealth but it does stress the obligation to be generous and it highlights the risk of loving money.  Wealthy Biblical individuals include Abraham, Solomon and Job.  Examples of generosity include Joseph, called Barnabas, Cornelius and Philemon.  Some scriptural passages include:

Warning against the love of money.  Hebrews 13:5 says to Keep your lives free from the love of money and be content with what you have.  Matthew 6:24 says No one can serve two masters, for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.  1 Timothy 6:6-12 says But godliness with contentment is great gain, for we brought nothing into the world, and we cannot take anything out of the world. But if we have food and clothing, with these we will be content. But those who desire to be rich fall into temptation, into a snare, into many senseless and harmful desires that plunge people into ruin and destruction. For the love of money is a root of all kinds of evil.

Charitable Giving/Stewardship. Charitable giving is a recurring theme throughout the Bible.

Acts 20:35 says In all things I have shown you that by working hard in this way we must help the weak and remember the words of the Lord Jesus, how he himself said, ‘It is more blessed to give than to receive.’  2 Corinthians 9:7 says Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver.

A profoundly spiritual paradox is that giving is the ultimate source of great wealth and happiness.

Blessings & Rewards:  The Bible is sometimes maligned by a narrative of vengeance and punishment, but there are many passages related to blessings and rewards.  Proverbs 3:9-10 says Honor the Lord with your wealth and with the first-fruits of all your produce; then your barns will be filled with plenty, and your vats will be bursting with wine.  Matthew 5:21 says His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master’s happiness!’

These passages don’t endorse the prosperity gospel, but they do provide a broader perspective than is commonly portrayed.

Work and Money and Happiness.

The value of work is a robust finding in happiness research.  Quite simply, a job gives a feeling of earned success and it lifts up our pride and self-worth.  Despite long commutes, the drudgery of routine tasks, all-too-frequent Zoom sessions and bad managers, work provides a sense of achievement, creative effort, and self-reliance.  In contrast, unemployment and underemployment bring misery and despair.  There is a danger in over-romanticizing work, and there are clear cases of a bad fit.  In these circumstances there is a need for job skills and training for the marginalized.

Whether running a hedge fund or trimming a hedge, work creates a sense of purpose that transcends the paycheck.

Some things money just can’t buy

“Tell me that you want the kind of things that money just can’t buy” according to the Beatles song ‘Money Can’t Buy Me Love.’  The focus of this blog post has been on the relationship between happiness and money (and the lack of money).  As mentioned previously, happiness and money are interrelated, but there are some fundamental factors that are in many ways independent of money.  After all, there is a difference between being rich and wealthy.

Listed below are some additional key happiness factors:

Relationships.  You can’t buy friends and family.  They are there, and are important whether you live in poverty or have a fortune big enough to buy Texas.  A close bond with people we trust and confide in is essential to our happiness and overall well-being.  Relationships keep us grounded, they sustain us through good times and bad and they give us a sense of community.  People with strong ties to friends and family have the highest levels of happiness and wellbeing and friends and family relieve feelings of depression and negative thinking.  They lift us up and help us see something bigger than ourselves.

Faith and Spirituality.  Research has shown over and over that people with faith and who follow a spiritual practice tend to be happier and more able to handle life’s vagaries than nonbelievers.  Faith helps take the focus away from narrow self-interests to ponder the deeper meaning and purpose of life.  Faith is transcendent, it is bigger than us, and it helps us grow.

Purpose and Agency.  Purpose is critically important in providing meaning in our lives.  The utilization of our talents, passions and aspirations helps us gain a sense of our unique calling, and that we are here for a reason.  Personal agency is the belief that you have the ability and capacity to influence or handle your thoughts and behavior related to circumstances and various life events.  It involves faith that you can deal with life’s tasks, challenges and opportunities rather than being powerless.  The combination of purpose and agency provides meaning and wellbeing and a sense of our personal destiny.

Giving and volunteering.  There is a high correlation between charitable giving and happiness.  Giving has the potential for great transformation that provides immense joy.  By contrast, psychologists report that self-centeredness and self-absorption tend to lead to stress behaviors, isolation and unhappiness.  Volunteering our time can even give us the feeling of having more time because we feel we can decide to give some of it away.  

See  Cornerstone Charitable 

Gratitude.  Gratitude involves thankfulness and appreciation of what is valuable and meaningful.  It has been shown to improve mental health, boost the immune system and contribute to an overall sense of well-being.  Gratitude includes kindness, which research links to physical and emotional benefits.  Fight-or-flight stress hormones are diminished as your brain releases oxytocin, a hormone that is correlated with trust, reduced fear and positive emotions.

Forgiveness.  Forgiveness is the conscious and deliberate act to release feelings of anger and negative emotion directed towards someone who has wronged you.  Forgiveness gives freedom from resentment, vengeance, hatred and other unhealthy emotions that are detrimental to happiness.  It doesn’t require reconciliation.  It allows us to extend grace and it liberates us from being captive to the offended one.  Forgiveness has been shown to reduce stress, anxiety and depression and to provide a more optimistic sense of well-being.

The attributes listed above greatly benefit individual happiness, and in turn they benefit broader humanity.  These benefits are incalculable, but they are very real.

Wrapping Up

Happiness and money are interrelated and entangled in many complex ways.  This web post provides only a high-level overview.  Coverage of many of the factors is cursory, and only scratches the surface.  It needs to be said that poverty doesn’t guarantee virtue, and wealth does not guarantee vice.

The headline results show that a lack of money reduces happiness.  Time and space do not allow exploration of topics like income and wealth inequality.  Money can be harmful if it becomes a source of personal identity or dysfunctional attachments.  Money generally does not produce lasting happiness beyond a short-term sugar high.  On a longer-term basis, however, it enrichens life and it can provide a greater sense of well-being, contentment and overall positive life evaluation.

Finally, from a holistic perspective, there are non-monetary factors that are hard to measure empirically, but that have immense intangible benefits.  Arthur Brooks, Harvard professor and past president of the American Enterprise Institute, summed these up best: “like kids taught to read, habitats protected or souls saved.”

Jeff Johnson, CFA

May 7, 2021

Cornerstone exists to provide a mix of investment information within the context of a Christian perspective.

For more information  See Cornerstone Investments 


2020 began with hardly a cloud in the sky.  It seems like a long time ago when we gave little thought  to simple things like going to work or socializing with family and friends.  Going or to our kids’ or grandkids’ soccer game or shopping were routine.  We knew we faced a polarizing election, but at least voters would sort it out.  Most everyone had a job and the U.S. unemployment rate was at 3.5%, a 50-year low.  Investors were benefitting from the longest economic expansion and the longest bull market in history, Chinese trade-war tensions were subsiding, and the 2020 outlook was promising. 

Then, the lights went out and 2020 became a year like no other.  COVID-19 became the dominant theme of the year, and it impacted everything.  It seemed like the word “Unprecedented” was used in every other sentence.  

The Shutdown Caused Many Hardships:  Life came to feel surreal as normal activities ground to a halt and the economy and most other activities shut down faster than at any time in history.   Lockdowns, Stay-At-Home orders, Work-From-Home and social distancing meant that many social activities, businesses, schools and churches abruptly went dark.  Parents were suddenly attending to school-aged children and helping with distance learning while dealing with a precarious work environment.  Unexpected impacts included shortages of toilet paper, Clorox and baking flour.  Bad haircuts and motion-sensing Purell dispensers became the norm.  The NBA season and the NCAA basketball tournament were early casualties.  Zoom became a staple of everyday life, and “You’re muted!” became an all-to-common refrain.  Who knew Domino’s Pizza would displace a nice restaurant. 

With no significant pandemic experience in over a century, it was naively assumed that it would be under control by summer.  Obviously, COVID-19 virus proved more formidable and forced much unexpected change.  Over 10 million were unemployed by the end of March.  Oatmeal consumption jumped over 200%.  Liquor sales spiked in 2020 as people used it as a way to cope with mental distress.  COVID fatigue set in.  Isolation took its toll.  People died without the presence of family and friends.  Little did we know that the U.S. would grieve the loss of over 340,000 deaths over the course of the year. 

Uncounted small business owners lost their life work and many displaced workers lost jobs that would not return.  The number of shooting victims in New York City more than doubled in 2020, with low-income and minority communities hardest hit.  As if the COVID virus wasn’t enough, the May 25 killing of George Floyd thrust America into a soul-searching reckoning related to racial injustice.  Although not caused by COVID, this tragic event caused social upheaval and a deep a psychic scar.  Finally, the U.S. faced a polarizing election.

Gratitude for the Real Heroes:  Despite the many hardships, there came to be a recognition and profound sense of gratitude for the real heroes.  The healthcare and other essential workers cared for the virus victims and kept the country functioning.  

-Health care workers demonstrated incredible dedicated service despite personal danger and sacrifice as they risked their lives to save others. 

-Everyday workers delivered packages and stocked shelves.

-Medical supply people provided masks, car companies produced ventilators and Clorox disinfectant production was stepped up.

-Scientists and researchers raced against time to develop treatments and vaccines.

-And finally, there were uncounted and often un-noticed acts of helping and compassion by everyday people who helped meet needs wherever possible.

These examples showed courage and persistence in the face of adversity and long hours, and they are a true inspiration.  The sacrifices add up to something much bigger than is readily evident and help to comprehend the meaning of who and what is really essential.

Charitable Contributions:  Although charitable giving typically declines during economic crises, numerous reports show that people actually increased their giving.

Meals on Wheels, food banks and health-related charities saw increased giving during the pandemic, as Americans opened not only their hearts but also their checkbooks.  There was also a big upward shift in indirect aid.  As people became more aware of the needs in their community, there was help for vulnerable neighbors and support for local businesses through the downturn.

Expressions of Basic Humanity and the Human Spirit:  A common refrain has been that we are all in this together.  This hardship brought out many unique expressions of solidarity and resolve.  A few examples:

-People across the country cheered healthcare workers and COVID-19 survivors. 

-Parades of police and car caravans celebrated birthdays and other significant events.

-Minnesota landmarks were lit in purple to honor frontline workers battling the pandemic. 

-Singing from balconies and other social distanced places battled the isolation: Boston residents belted out “Lean On Me” and Chicago metro area residents responded by singing the National Anthem and “We are the Champions.”

-These events went viral on social media and helped many others to cope.

COVID-19 tested us.  We didn’t always act in the noblest ways.  We’re all susceptible to COVID fatigue.  There were certainly situations where social distancing was ignored and super spreader events caused more cases, hospitalizations and deaths.  Nevertheless, we don’t want to forget the inspirational displays of goodness and basic humanity that helped lift us all up.

Vaccines-The Beginning of the end:  The word “Unprecedented” certainly applies to COVID-19 vaccine development as drug companies created a vaccine against a novel pathogen within a year of its discovery, the fastest ever.  The shortest timeline previously was for the Mumps vaccine, which took four years according to the Washington Post.  Not everyone gets a chance to save the world, but dedicated individuals worked relentlessly to end this pernicious virus.  The work by Pfizer, Moderna and many others represents a testament to scientific genius, the spirit of invention, persistence and a commitment to a higher cause.  There is also a bright spot related to this research because the Messenger RNA used by Pfizer and Moderna may be used for future therapeutics to target other diseases, including cancer. 

These vaccines are truly a game changer.  We can only wonder what it would be like and how we would feel if these vaccines development time took two or three years.

Return to Normal?:  As the COVID-19 ordeal ends there is a natural desire to return to normal.  As the isolation gradually winds down, how quickly will people feel comfortable again seeing family and friends, taking vacations and going back to baseball and football games?  The reality is that we aren’t going all the way back and some changes will be permanent.  It has become a cliché to state that we have experienced 10 years of change in one year.  But the pandemic has accelerated structural changes long in the making.  Some businesses will not return and some jobs have been lost forever.  There is deep uncertainty about how consumer and office-worker behavior might have changed.  There is a huge hangover of debt.  Education is likely to see many permanent changes.  What will our churches be like, and who will come back?  Adversity causes changes, and how will people react?  COVID-19 forced us to be more resilient and self-reliant.  As we think of the lessons learned and our reshaped priorities, hopefully the changes will help us be more aware, patient, deeper, compassionate and thankful.


Healthcare factors aren’t typically big market drivers, but COVID-19 dominated the markets in 2020.  While 2020 was volatile, it is helpful to examine the year in a broader context.  The graph below shows the longest bull market in history from March 2009 through February 2020.  It also shows more protracted historic bear markets that often last far longer than the recent short downturn in 2020.  Although accurate short-term projections are difficult, history gives a longer perspective and says it would not be prudent to extrapolate the recent market strength forward for the next ten years.   

As shown below, investors benefitted from a record long 11-year bull market.  This time period was accompanied by a record long 10 ½ year economic expansion.  But both streaks ended in February as COVID-19 abruptly shut down the economy.  Since there was no good pandemic precedent, the market panicked with the fastest decline in history into a bear market with waves of indiscriminate selling.

Both the Federal Reserve and Congress, benefitting from what was learned from the 2008/2009 Great Recession, reacted in record time with extraordinary monetary and fiscal stimulus.  The market, recognizing this unprecedented stimulus, reacted with the fastest bull market recovery in history.  The whiplash in the first half of 2020 produced the most extreme quarterly performance variance since the 1930s.

The table below provides additional perspective:

-2020 performance was generally well above historic norms.

-Volatility as measured by Standard Deviation was also high compared to the longer-term ten-year average.

-Small cap stocks and emerging markets are particularly volatile.

-Foreign developed and emerging markets stocks have been laggards over the last ten years. 

-Long maturity U.S. Treasury bonds had extraordinary performance as interest rates declined and bond prices jumped upward (more below). 

The observations from the table above provide context and perspective related to expectations for the future.  One notable point is that recent performance is a poor forecast for the future.  Listed below is additional information related to market expectations.

Consensus Economic Outlook

There is a difference between the economy and the stock market, and the two do not move together in lockstep.  Nevertheless, the economy is a major driver of corporate profits, and corporate profits are a clear driver of the stock market.  The COVID-19 virus caused a global economic recession in 2020.  China and Taiwan were the only major economies to achieve positive 2020 economic growth.  The recession caused a significant reduction in 2020 corporate profits and contributed to the sharp market decline in March.  Consensus expectations show a significant 2021 recovery and this should help increase corporate profits and help support the market.

There are a number of reasons to support the rationale for a strong 2021 economic recovery.  The rapid development of vaccines gives relief to lockdowns and shutdowns and a resumption of more normal growth.  There is also a fair amount of pent-up savings and demand, and consumers are likely itching to spend some of it.  It is encouraging that forecasts are being revised upward, and these positive revisions are a positive indicator.  It is noteworthy that many forecasts see a rising level of inflation.  Inflation has been very low over the past decade, but massive government stimulus, improving economic growth and widening government budget deficits are reasons to push inflation higher.  If inflation increases, it typically doesn’t hurt stocks too much unless inflation gets up to higher levels.  Higher inflation will crush long-maturity bonds, however.  While these forecasts focus on the vaccines and on hefty stimulus, domestic politics and geopolitical issues continue to be potential wildcard factors.  It needs to be said that economic forecasts are subject to a wide range of outcomes.

Wall Street Targets

Wall Street has long provided price and earnings targets for the upcoming year.  History shows that these expectations may not be accurate, but they do show what is priced into the market.  If there are no big surprises (like the 2020 coronavirus), then these targets provide perspective and can be helpful.

A summary of the top 14 Wall Street firms compiled by CNBC shows the following:

A few comments regarding these targets:

-Central bank stimulus and COVID-19 recovery are seen as major drivers.

-The recent uptick in mergers & acquisitions is seen as continuing in 2021.

-They all show the market moving up in 2021.  When everyone sees upside, much of the optimism may already be priced in and the stage could be set for a decline.

-All show lofty Price/Earnings ratios that show valuation levels well above historic levels.


Equity markets are expensive by most valuation metrics.  The S&P 500 consensus Price/Earnings ratio for the next/forward twelve months is a common valuation measure and is listed below:

At a cursory level, it looks like the market is nearly as expensive as the late 90s internet frenzy, and you have to wonder if we are “Partying like its 1999.”  Many remember how that ended.  There are a couple of major differences, however, between 1999 and 2020.  The 10-year U.S. Treasury bond yield was over 6% in 1999, and now it is at 0.9%.  In addition, many technology companies in 1999 were young and had minimal earnings, and today’s leaders have dominant business models.  (Like Microsoft, Google, Amazon, etc.)

Although valuation levels aren’t quite as stretched as in late 1999, it is still sobering to remember that the tech-heavy Nasdaq fell 78% from March 2000 to October 2002.

Market bulls acknowledge high current valuation multiples, but see equities delivering decent relative returns versus even more expensive bonds.  They believe that markets look less expensive when juxtaposed on a relative basis against current low interest rates and a low inflation environment.  While conceding high valuation levels, they believe equities will grow quickly and catch up to their high valuation levels.

Market bears point to the extraordinary monetary accommodation around the world driven by central bankers dealing with the virus-induced slowdown.  This stimulus has made all assets expensive, and results in low forward returns for both stocks and bonds.

It seems clear that the market has pulled forward some post-vaccine economic growth into current valuations and it will take time for the U.S. to grow its way into these valuation levels.  Central bank monetary stimulus has also made all assets expensive as nearly-free money distorts valuation levels.  It also seems reasonable that when equities are adjusted for low interest rates, valuations aren’t quite as extreme.  This is especially true given the fact that U.S. Treasury bondholders are currently receiving negative inflation-adjusted real rates of return due to low nominal interest rates.

History shows that Valuation levels are not a good predictor of short-term returns, but they are a good predictor of longer-term returns.  Consequently, the current high valuation levels could persist for some time.  There are market pundits predicting both an imminent bear market and a sustained bull market, but it would be a fool’s errand to confidently predict either.  Regardless, current valuation levels and low interest rates point to below-trend investment returns on a longer-term basis.  While returns for stocks could be lower over the next decade, they should still perform better than longer-maturity bonds.

What To Do Now

The markets have generated big returns in 2020, and also since 2009, and it is easy to be lulled into a false sense of overconfidence.  The big gains by year-end 2020 help us forget the precipitous decline in March.  But markets run on fear and greed and the euphoric emotion can plummet once again into volatile, undisciplined selling.   Here are some factors to consider:

-Don’t let big up or down market moves change your investment objective.  Big upside market moves make us forget the pain of down markets and to overestimate our tolerance for downside risk.  This could cause additional buying of an expensive market.  Similarly, big down markets cause us to abandon all hope and to get too conservative and to sell at the bottom.

-Rebalance.  At a high level, rebalancing involves trimming the weights of the biggest gainers (because they have grown too big compared to your strategic weight) and buying the laggards (which have become underweight).  To take an extreme example, if you own Tesla-TSLA (up over 700% in 2020), then the stock and the large growth asset class are too big and should be trimmed back.  The cash proceeds from the sale should be put into the cheaper underweight assets.  If you are a self-directed Do-It-Yourself (DIY) investor, then you need to rebalance your portfolio.  If you have an adviser, then ask them about rebalancing.

-From a tactical standpoint, Small Cap stocks and Emerging Markets have trailed in recent years and look most attractive.

-Avoid FOMO (the fear of missing out). Do your own thinking.  (See below)

-Stocks that are up the most are excellent candidates for charitable giving.  This is a way to help achieve a rebalanced portfolio.  A key Cornerstone objective is to encourage charitable giving.  See Charitable Contributions

-Avoid long-maturity bonds.  If inflation heats up, these bonds will perform badly.

-Don’t make plans for 10% future equity returns.  Current high valuation levels indicate that 6% equity returns are more reasonable for financial planning and retirement expectations.

More Detail and Red flags Below:


Investors should utilize funds unless there is sufficient time and experience to research individual securities.  Even then, most investors would achieve greater returns with an index fund than picking stocks.  Nevertheless, it is interesting to review some high performing and high-profile stocks as listed below:

(Sorted by 2020 returns)

Some Comments:

-The big winner was Novavax, a biotech company trading on Nasdaq that is in late-stage trials with a COVID-19 vaccine.  If the vaccine gets approved, the price will be justified.  Otherwise, it might return to single digits.

– Tesla is noteworthy.  Tesla is the sixth-largest company in the S&P 500 but it is not profitable without regulatory emissions credits.  Tesla’s market value is currently 2 times the combined value of Ford, GM and Toyota.  Elon Musk is a true visionary, but the valuation looks very stretched.

-Moderna is up based on their successful COVID-19 vaccine.  Few knew of Zoom before the pandemic hit, but Zoom kept us going through all the isolation.

-The S&P 500 market value is dominated by five big tech stocks:  Alphabet/Google, Amazon, Apple, Facebook and Microsoft.  These five stocks have significantly outperformed in the past.  You might characterize the S&P 500 as the Big 5 and the little 495.  The Big 5 outperformance may continue for a while but it is not likely to persist in the longer term.  A diversified portfolio has stood the test of time, and an overconcentration in these stocks poses longer-term performance risks. 

It may be tempting to invest in a few potential high-flyers to boost your retirement account.  For example, if you bought $1,000 worth of Amazon when it came public in May 1997, it would have grown to $2,175,000 by year-end 2020.  What’s not to like?  For every Amazon, however, there are hundreds of losers like and had the distinction of spiking over 10x during its first day of trading, but its business model is long gone.    

The reality is that it is difficult to find many of the big winners before they make their big moves.  Most of the big 2020 stocks benefitted from COVID-19, and no one saw the virus risk at the beginning of the year.  At this point it is difficult to identify the 2021 market drivers.

Small Cap Stocks:

Small cap stocks have outperformed large cap stocks historically, although they have been laggards over the last 10 years.  Small caps as measured by the Russell 2000 index trailed large caps in 2020 until the fourth quarter.

Although small caps are more volatile, they are important in a portfolio’s overall asset allocation plan.  Small caps are expected to offer significant forward growth because their greater operating leverage allows profits to grow faster in an expanding economy.  Small caps have been under-owned and should benefit from increased investor interest.

Foreign Stocks:

International stocks outperformed in the 1970s, 1980s, and the 2000s, but have trailed the S&P 500 since the 2008/2009 Great Recession.  International stocks are cheaper than U.S. stocks, and especially U.S. large cap growth stocks, and should benefit from investors seeking cheaper valuation levels. 

Emerging Market Stocks:

Emerging Mkts:  Emerging market stocks are another asset class that has trailed in recent years, but has provided a nice rebound in Q4.  Emerging market stocks are more volatile but offer better growth prospects than developed markets based on a younger population and a growing middle class.  China is a large component of emerging markets and it offers significant growth potential.  Emerging markets benefit from a weaker dollar, they are cheaper than developed markets, they offer diversification benefits and they look poised for good longer-term performance.

Historic Interest Rates

Interest rates have been trending lower since the early 1980s.  The 10-year U.S. Treasury bond interest rate peaked at 15.82% in September 1981 as the U.S. battled double-digit inflation.  As inflation subsided, rates have trended lower.  Interestingly, forecasters, including the US Federal Reserve, have consistently projected rising rates.  Historic long-term bond total return performance has been high due to bond price increases as rates declined.  With interest rates at current low levels, there is little potential for additional bond price gains.  Instead, any increase in yields will negatively impact bond prices and will be a drag on total return performance.  If inflation picks up faster than expected, then longer-maturity bonds will experience significant negative performance. 

Interest Rates in 2020:

The 10-year US Treasury bond began 2020 with a 1.92% yield.  As the COVID-19 pandemic spooked markets, the 10-year treasury yield briefly plunged below 0.5%, on March 9 due to recession fears.  The yield then spiked upward based on a safe haven flight-to-quality trade.  As vaccines allow for increased economic activity, rates have risen to 0.92% at yearend.  At this time, real yields (nominal yield net inflation) are negative.  Fed policy is to keep short-term rates like 90-day Treasury Bills pinned near zero through 2023.  With this low interest rate backdrop, short bonds will earn very little return and longer maturity bonds may have negative returns as interest rates eventually normalize and bond prices decline.    

Historic US Dollar:

The U.S. dollar peaked after Fed Chair Paul Volcker and President Reagan broke the back of double-digit inflation with high interest rates in the early 1980s.  The dollar rose again between 1997 and 2002 as Germany assumed high costs of reunifications with East Germany and as Europe implemented austerity plans and increased taxes.

US Dollar in 2020:

The dollar was trending up in early 2020 until markets panicked and interest rates fell over recession fears from the pandemic.  The dollar then blipped up in late March as traders pursued a safe haven flight-to-quality trade.  More recently the huge monetary and fiscal stimulus and the prospect of federal budget deficits have been factors causing the dollar to fall.  The Federal Reserve’s policy to keep short-term interest rates near zero until 2023 is also pressuring the dollar lower. 


The 2020 market produced great returns but trees don’t grow to the sky.  There are notable “Red Flags” that warrant scrutiny and consideration.

Fed Put. The Fed “Put” is seen as a Backstop:  the so-called Fed “Put” continues to provide investor support based on the widespread belief that the Federal Reserve will move aggressively to prevent or at least mitigate any deep market swoons.  Although there is no actual Fed Put trade, (Put Option trades offset market downside risk), Fed actions are seen as providing “Put-Like” protection against severe market declines.  In any event, the Fed Put narrative encourages risk taking without having the actual wherewithal to prevent a severe market decline.

FOMO:  The recent market strength has surprised many institutional investors, and there does appear to be an element of FOMO-the Fear Of Missing Out.  Markets trade on fear and greed, and the current market strength appears to have a significant amount of momentum-based trading.  The current greed factor can be reversed quickly, as was seen this past March. 

IPOs-Initial Public Offerings:  U.S. Initial Public Offerings (including Special Purpose Acquisition Corporations) raised a record $167 billion in the U.S. during 2020, compared with the previous record of $108 billion during the 1999 dot-com boom, according to Dealogic.  These deals have jumped roughly 18% on their first day of trading, and there is a concern that the market is getting too frothy.     

Margin Debt and Options Contracts-Investors borrowed a record $722 billion in margin debt against their investment portfolios through November according to the Financial Industry Regulatory Authority.  High margin debt levels preceded market peaks in 2000 and 2008.  Option contract volume has also been at record levels.  Call option contracts and other derivative strategies can be very lucrative in bull markets, but can be disastrous in sharp market declines.

New Retail Investors and Robinhood:  Market observers point to increased retail investment activity by newer and less experienced investors.  The Robinhood trading platform grew rapidly by offering zero commission trades and an appealing user interface.  Charles Schwab, Fidelity and others quickly matched Robinhood’s zero commission trades. With big 2020 gains, investing has been eurphoric, just as it was for day traders in 1999.  No one knows where markets are headed on a short-term basis, but the Robinhood phenomenon is a clear red flag. 

The Red Flags listed above are not a call to sell all and go to cash.  Time in the market is more important than timing the market.  But the analysis points to a disciplined approach to rebalancing and tactical adjustments away from high-flyers and towards under-owned and cheaper asset classes like small caps and emerging markets.  It is also a cautionary warning against the long-maturity bonds. 

Wrapping Up:

2020 was a year like no other.  The word “Unprecedented” was used often because it is hard to find another word to better describe the year.

To recount a few examples:

-Deaths, ICU units at capacity, temporary hospitals in parking lots.

-Health care and essential workers pushed to the limit.

-Record short vaccine timeline development.

-Charitable giving and acts of compassion.

-Numerous investment and economic records for depths, heights and speed. 

Looking to 2021:

Thanks to vaccines we can look forward to a better year as we can re-connect with family, friends and work associates.

The markets are less predictable but we can say a few things: 

-Last year’s gains were surprising, and the future will bring more surprises, both good and bad.

-Last year ended up being a good year in the market but it is important to never confuse a bull market with brilliance.

-Markets are noted for teaching great humility and that definitely applies to this analysis.  The commentary is intended to provide educational perspective, but only time will tell what the future actually brings. 

-No one knows exactly when the music stops, but a proactive, disciplined approach is essential to providing good long-term returns. 

Goodbye 2020 and all the best to 2021!

Jeff Johnson, CFA

January 4, 2021

For additional investment and financial planning information See Cornerstone Investments

0.01% at the Bank? Some Alternatives

Interest Rates at 0.01% at your bank! This dates me but I remember my first mortgage at 9%. At the beginning of 2020 the economy was progressing on cruise control, unemployment was at low levels not seen in 50 years and you could earn roughly 2% on your money market fund. Nobody foresaw the COVID19 pandemic, a million+ lives lost and a global recession. Little did we know that Clorox, Peloton, Netflix and Zoom would be so important in our lives. The financial markets reacted violently with stocks first plunging 35-50% and then recovering at historic speed to all-time high levels. Interest rates reacted as well. Deposits at checking and savings accounts, money market funds and other short-term investments dropped precipitously, often to 0.01%. That’s one penny earned in one year on a $100. Talk about getting rich slowly. On the scale of things, this is not one of the biggest problems, but it is worth considering alternatives.

The Federal Reserve did what it had to do.

The Fed reacted to the COVID-induced shutdown and recession by driving down interest rates to support an economy that was in free fall. The Fed (with lessons learned from the Great Recession of 2008/2009) did a superb job and likely prevented a Depression. By driving down interest rates, they made borrowing much cheaper for car loans, mortgages, educational loans and for corporate borrowers to keep businesses running and people employed. But driving down interest rates also impacted deposits at financial institutions.

Banks, brokerage firms and other financial institutions reacted by reducing rates they paid on deposits to near zero. (It seems like a long time ago, but many money market funds were paying over 2.25% in 2019.) Banks and brokerage firms have been able to maintain sufficient depositary assets while paying little interest because these assets are “sticky”. It is a hassle to switch to alternative accounts that pay higher interest rates, but it may be worth it.

What You Can Do.

These low rates are not going to pop back up quickly again, either.  The Fed has communicated a policy to keep short-maturity rates near 0% until 2023, essentially “Lower for Longer”.  For perspective, the Fed kept rates near 0% after the Great Recession for 7 years-from late 2008 through late 2015.

With the prospect of essentially 0% for perhaps the next three years, it makes sense to consider alternatives. Although there is no silver bullet, a high-quality, short-term bond fund makes a lot of sense as a substitute for current money market holdings in cases where there is not a need for near-term liquidity.

Short-Term, High-Quality Bond Funds:  A good example is the Schwab Short-Term Bond Fund-SWSBX. There are others as well. For example, the Vanguard Short-Term Bond Fund-BSV is another candidate. In addition to purchases in Schwab or Vanguard, these funds can be purchased in many other brokerage accounts like Fidelity or JP Morgan as well.

The Schwab Short-Term Bond-SWSBX is recommended based on my Cornerstone LLC fund rating analysis.

Recommendation Rationale:
Higher Performance and Yields than most bank accounts and money market funds: SWSBX is up 4.18% for 2020 through October 23. The fund’s 12 Month Distribution Yield is 1.84% and the current month distribution yield is 1.17%.

Reasonably Conservative: 72% US Treasury’s, 28% Investment Grade Corporate bonds. Overall Credit Quality = AA.

Relatively short maturities and less vulnerable to unexpected rising interest rates. The Duration = 2.75 and Effective Maturity = 2.9 years.

Good Overall Ratings: Morningstar Overall Rating = 4 Stars (1 Star is lowest and 5 Stars is highest). Morningstar ranks it as Above-Average Return and Below-Average Risk compared to the comparable benchmark.

Lower Volatility: The NAV value increased every month in 2020, including March when stocks sank over 30%. It should be noted that this fund could have some negative monthly performance, but total return performance over a longer period of time should significantly exceed bank accounts and money market funds.

Future Performance: Fund Distribution rates and investment performance will likely come down over time as older higher-yielding bonds mature, and are replaced by new bonds that have lower yields.

As with all investments, there is a need to continue to monitor this fund and other alternatives and there may be a need to make changes based evolving market conditions.

Intermediate-Term Investment Grade Bonds represent the next step up in the risk/reward tradeoff. An example is the Vanguard Intermediate-Term Bond Index-VBIIX. This fund has a Credit Quality rating of A, a Duration of 6.5 and a Maturity of 7.4 years. This fund has returned 4.5% annualized over the last 5 years, but it represents more risk, and especially during economic recessions. This fund would also be more vulnerable to a sharp, unexpected rise in interest rates.

Other Alternatives Less Appealing:

Certificates of Deposit:
Bank and brokerage CDs are mostly locked in at very low interest rates and look less attractive. Some examples are listed below:

Schwab CDs: APY**
1 to 9 Months: 0.1%
10 to 18 Months: 0.15%
1.5 to 2.5 Yrs: 0.2%

Higher Yielding Online CDs-1 Yr* APY-1 Year
Ally Bank 0.65%
Marcus Bank by Goldman Sachs 0.65%
Synchrony Bank 0.60%

Online Savings Accounts:
These online savings accounts likely offer interest rates above your local bank, but you will need to set up the online account.
Higher Yielding Online Savings Accounts* APY
Vio Bank 0.76%
Citibank 0.70%
Synchrony Bank 0.65%

Top Online Money Market Accounts:
Online money market accounts also require setting up an online account.
Higher Yielding Online Money Market Accounts* APY
First Internet Bank 0.60%
Ally Bank 0.50%
Synchrony Bank 0.50%.

* Source = as of 10/23/20
**APY is the Annual Percentage Yield.

Note: The data listed above provides an indication of rates for larger, more well-known names, and it doesn’t necessarily reflect the highest rates. Rates often vary depending on the amount deposited and some of the highest APYs may include monthly service fees. Not all rates have identical terms and conditions, and some rates may be introductory promotional rates. ATM access and fees also varies widely. It is important to carefully review the terms and conditions of each offer before making any investment. The financial institutions listed above are not specifically recommended. Data as of 10/23/2020.

In addition to, other online sources include: (Lending Tree)

See Cornerstone Investments for more information related to investing and financial planning

Jeff Johnson, CFA
October 24, 2020

The information provided above is for informational and educational purposes and it does not constitute personal investment recommendations or investment advice. The investment information presented is generalized and it does not take into consideration the individualized needs, objectives, constraints or unique circumstances of individual investors. Historic market trends, risks, patterns and relationships may not continue into the future and assumptions and predictions may not prove valid. Past performance does not guarantee future performance. Markets are dynamic and subject to change and all investment commentary is subject to change or revision without notice. Cornerstone uses multiple data sources wherever possible to help provide data and information that is comparable across various asset classes and is consistent over the course of time. All data and content is derived from what are considered reliable and credible sources, but Cornerstone does not accept responsibility for any errors. The user accepts all responsibility for actions taken based on information from Cornerstone Investment Associates, LLC.

2020 Mid-Year: Clorox, Zoom, FOMO and More

We all know that 9/11 changed everything, and so does COVID-19.  Stay-At-Home orders, social distancing and masks are now familiar parts of our routine.  Just as we evolved from 9/11, we will evolve from the novel coronavirus.  Nevertheless, “Unprecedented” seems to be the word that best characterizes the first half of 2020.  Listed below are relevant factors:

Noteworthy Movers: 

Although the broad stock market was down 3.1% for the first six months of 2020, Clorox was one of the top stock performers with a gain of 45%.  Few people knew of Zoom at the beginning of the year, but it is up 6X from it’s April 2019 IPO.  More obvious first-half winners include Amazon up 49%, NetFlix up 41% and Apple up 25%.  On the speculative side, Tesla was up 158%.  Airlines were the obvious losers with Delta down 52%

Index Benchmark Performance As Of 6/30/2020:

Major Benchmark Performance: Last 3 Last 12
1 Mo  Months YTD Months
Since: 5/31/20 3/31/20 12/31/19 6/30/19
As Of: 6/30/20 6/30/20 6/30/20 6/30/20
US Large Cap-S&P 500 1.99% 20.54% -3.08% 7.52%
US Small Cap-Russell 2000 3.53% 25.42% -12.98% -6.63%
Foreign Developed-MSCI EAFE 3.40% 14.87% -11.36% -5.15%
Foreign Emerging Mkts-MSCI EEM 7.35% 18.09% -9.77% -3.38%
US Bonds-Barclays Aggregate 0.63% 2.90% 6.14% 8.74%
Long Treasury-20 Yr+ US Treasury Bonds 0.13% 0.12% 21.62% 25.97%
High Yield-Bloomberg 0.98% 10.18% -3.80% 0.03%

The Bear Market struck with a vengeance in March after a record long 11-year bull market and a record long 10 ½ year economic expansion: 

In addition, the drop was accompanied by record-high volatility. The S&P 500 fell from an all-time high to a bear market decline of over -20% in only 22 trading days, the quickest decline in history, even faster than during the Great Depression. Moreover, the S&P 500 set a record of eight consecutive days in which the index moved up or down by at least 4%. Then, the S&P 500 made the quickest recovery in history from a Bear Market to a technical Bull Market (up 20% from a recent low). With the price volatility at record levels in both directions, the overall investment performance has improved significantly since the March 23 lows.

Performance has rebounded since the March lows:

Although the S&P 500 fell -33.9% by March 23 from the all-time high, it is now down only -3.1% YTD as of June 30.  The first quarter had the worst performance since the 2008 Great Financial Crisis, and then the second quarter was the best performance since the 4th quarter of 1998.  This whiplash was the first time with such extreme quarterly performance since the 1930s.  U.S. small caps continue to lag behind the perceived relative safety of larger U.S. companies and are down -13% so far in 2020.   Foreign developed equity is down -11.4%Emerging markets were the big surprise during June with a gain of 7.4%.  Longer maturity U.S. Treasury bonds benefited from declining interest rates and from investors seeking a safe haven, and are up 21.6% so far this year. Corporate bonds and especially high yield declined sharply in March due to increasing recessionary fears, but have since recovered somewhat in April through June largely due to the Federal Reserve’s corporate credit support.

Some market prognosticators refer to the big Q2 price recovery as the “Hopium” Trade and the Silly Season, but the reality is that the short-term market is difficult to predict and it forces humility on us all.

Economic Statistics are coming in better than expected:

Although economic statistics initially dropped precipitously due to the government-induced shutdown, they are now showing a significant improvement.

Unemployment (at a 50-year low of 3.5% in February) spiked to 14.7% in April but has since dropped to 11.1% for June.  Although this unemployment level is still a high level, it reflects the addition of 4.8 million new jobs and it was much better than the market expected.

– The Conference Board reported that its Consumer Confidence Index rose to a reading of 98.1 for June from 85.9 in May. Economists polled by Reuters had forecast the index rising to only 91.8 for June.

Retail sales for April declined 14.7%, the largest decline since 1992 when this data series was initiated. However, May retail sales jumped a record 17.7% on a month-over-month basis, well above the consensus expectation of 7.5%.  Retail sales were impacted by pent-up demand and government checks, so it is difficult to know what retail sales level will be reported in the future.  It is important to note that the May sales report was still down -6.1% on a year over year basis.

-The Leading Economic Indicators came in at a positive 2.8% after falling -6.1% in April and -7.5% in March. These statistics point to the sudden, large shutdown of the U.S. economy caused by the unprecedented coronavirus pandemic, and then an encouraging uptick.

Progress on Vaccines and Treatments:

Vaccines and treatments hold the promise of allowing the global economy to get back closer to normal, and there are numerous reports showing progress.  The U.K. government approved the use of dexamethasone, a steroid that cuts the risk of death for patients on ventilators and for those on oxygen.  There is also preliminary evidence supporting Gilead Science’s Remdesivir, an anti-viral treatment, and by vaccines from Moderna, Pfizer and others.  Moderna was said to “show promise” in phase-one trials and is progressing to phase-two trials.  Dr. Anthony Faucci, Director of the National Institute of Allergy and Infectious Diseases, also expressed optimism regarding a relatively quick approval.  However, a 12-18 month timeline still looks more likely.  Any COVID-19 vaccine would likely be first used to protect front-line health care workers and elderly who are at most risk to the virus.  Over time, a vaccine would achieve “herd immunity”, whereby the antibodies of the majority of individuals built up, either via exposure or vaccination, are sufficient to protect the remaining vulnerable people.  In the short-term, however, there is clearly a risk of a “Second Wave.”  Broad-based testing needs to be expanded so virus carriers can be identified and isolated.

FOMO-the Fear Of Missing Out:

The recent market strength has surprised many institutional investors, and there does appear to be an element of FOMO-the Fear Of Missing Out.  Markets trade on fear and greed, and the current market strength appears to have a significant amount of momentum-based trading.  Retail trading is up sharply based on commission-free trades and accounts like Robinhood that are said to be having significant trading volumes based on inexperienced traders.

Virus Resurgence:

As states move to reopen, there has been an unfortunate surge in new coronavirus cases and rising hospitalization rates in states like California, Texas, Florida and Arizona.  This has once again overstretched the health care system, and especially ICU units.  As a result, a number of states have paused or rolled back their re-openings, especially related to bars and restaurants.  There is also the prospect of a mutated version of the virus flaring up in the fall and winter.  Consequently, COVID-19 remains a global wildcard.

Market Valuations remain rich:

At this point, markets are ignoring weak 2020 corporate earnings, and are trading on expected 2021 earnings.  Nevertheless, various valuation metrics (like Price/Earnings ratios) for 2021 are still elevated.  It is important to remember that valuation doesn’t predict short-term performance, but valuation definitely impacts long-term performance potential.  In other words, markets could continue to move up on a short-term basis, but the longer-term performance might be a 5-7% average return/year rather than the historic 10%/year long-term U.S. stock return average.  See Market Valuation

Election Volatility:

According to recent political polls, Vice President Biden is leading President Trump by a significant margin, and the U.S. Senate might shift to control by the Democrats.  In the case where the Democrats win the presidency and control both the House and the Senate, then tax increases are likely.  Joe Biden has said he would raise the corporate tax rate from 21% to 28%, rolling back Trump’s 2017 corporate tax reforms.  Greater restrictions on corporate share buybacks are also likely.  A report from Goldman Sachs estimates that such an outcome would shift 2021 earnings per share for the S&P 500 to $150 from a current estimate of $170.  It is probably safe to say that a large earnings decline caused by a corporate tax increase would negatively impact market performance.  For individuals, higher capital gains tax rates, the elimination of the qualified dividend tax rate, and/or higher tax rates on top income earners are expected.  Without getting too deep into tax policy, there is a strong argument that higher corporate taxes makes our U.S. companies less competitive in international markets.  To the extent that U.S. companies are less competitive in the international market place, then they don’t expand  U.S. operations and they don’t hire U.S. workers.

Stock Market and Economic Disconnect:

The markets were buoyed in the second quarter by progress in “a flattening of the curve”, the prospect of re-opening the economy, and early reports regarding treatments and vaccines.  Moreover, recent economic statistics show a stronger-than-expected rebound from the initial dramatic declines.  As a result, the market seems to be anticipating a V-shaped recovery.  Although a downdraft to the March lows does not appear likely, there are numerous risks that could cause market weakness.

While recent economic statistics have been stronger than expected, they may reflect more pent-up demand rather than long-term growth.  Economic growth over the next year faces significant headwinds and is not likely to quickly recover lost output.  The economic recovery still looks like a “Nike Swoosh” or even a U-shaped recovery, not V-shaped, and it looks like there is a disconnect between the recent market rebound and the broader economic landscape. Although the market was up in the second quarter, it still looks vulnerable to additional sell-offs. The current situation seems to be the opposite of what happened in December 2018. At that time, the market sold off hard based on fears of a global economic recession, even though the economic data did not show an imminent recession. In January, 2019, Cornerstone described a Market/Economic Disconnect where economic fundamentals in late 2018 were much stronger than indicated by the sharp market decline. This time, however, the economic fundamentals are very weak, but the market has been ignoring these weak fundamentals as it rebounded significantly in April through June.  Only time will tell how the coronavirus recession plays out, but it is helpful to stay grounded in longer-term economic and market fundamentals.

It is helpful to remember that Bear Markets since 1950:

-the average bear market declined -35% and lasted an average of 14 months.

-the average bull market gained 199% and lasted an average of nearly 6 years.

Bear markets are typically much shorter than bull markets, they go down less, and they have always given way to another bull market.

The Federal Reserve has been very proactive:

ensuring funding for banks and companies. The Fed re-established many of the initiatives from the 2008 Great Financial Crisis that have proven positive in the past. A major difference is that the Fed established these support programs so quickly.  The Fed cut the Fed Funds rate to near zero in an emergency meeting.

The Fed also provided a “do whatever it takes” stance to support lending for small and large businesses, money market funds, state and local governments, and global central banks for foreign investors seeking the safety of the U.S. dollar.

U.S. Fiscal Legislation:

Congress passed a $2.2 Trillion coronavirus aid package to help stabilize the U.S. economy. Key provisions include support for individuals (the Paycheck Protection Plan and increased unemployment benefits), small businesses, large corporations, public health, and state and local governments.  This package is being called a rescue plan, and many politicians say there will need to be another round to provide stimulus. As with the Federal Reserve’s timely actions, the legislation is being implemented far faster than was the case in the 2008/2009 Great Recession.

U.S. Federal Budget Deficit:

Morgan Stanley released an estimate of the U.S. budget deficit of $3.7 Trillion for calendar year 2020, and they see an additional $3T in 2021. This would make the deficit approximately 15-20% of the U.S. GDP. This is larger than the 2008/2009 Great Recession level. This analysis does not incorporate the proposed $2T infrastructure bill. Although there is a clear need for monetary and fiscal spending during this downturn, there is also a looming longer-term issue related to U.S. budget deficits.


China was the first country to lockdown its economy in January, and official data show positive economic manufacturing and non-manufacturing growth resuming in March.  These reports do not indicate an imminent global turnaround, but they do represent a measure of improvement in China.  The Eurozone is experiencing economic improvement from the lows of March and April, but they are mired in an economic recession.  Japan is also stuck in a deep recession.

On a global basis, a June International Monetary Fund forecast shows a -4.9% 2020 global economic decline and then a 5.4% recovery for 2021.

What’s Next?

There is no good historic precedent for the coronavirus given that globalization has allowed pandemics to spread much more quickly than in the past. Consequently, we are in the midst of a global recession.  The first quarter market downdraft caused a lot of economic weakness to be priced in, but the strong second quarter market performance has now priced in a fairly optimistic outlook.  Since the depth and duration of the coronavirus remain unknown, continued market volatility can be expected.  With all these crosscurrents, it remains critically important to stay focused on longer-term fundamentals that should gradually improve.


Portfolio actions that you take (or don’t take) at this point can feel highly uncomfortable but the decisions are not rocket science. Investors were bailing on investment holdings at a near-record pace and then have been charging back in.  This is no time to be part of the herd’s stampede in either direction. Although there is much we don’t know about the ultimate coronavirus impact, there is also much we do know. There is nothing unique about the list below, but it is supported by ample historical evidence.

-Stay the course. Fear and Greed are really the biggest risks.

-Don’t sell unless you have a dire need for cash.

-Rebalance the portfolio to restore beaten-down equity holdings to a weight consistent with your long-term investment objectives.

-If you have cash, then add to equity holdings on a systematic basis. This isn’t easy, but a good strategy is to make several smaller investments over time rather than one larger trade. No plan is fail-safe, but this strategy is a way to get into the market without making one big move.

– Remember that investment performance is improved by buying in bear markets, not selling.

-Dollar Cost Averaging that invests a predetermined amount of dollars on systematic predetermined dates is a method that remains a valid investment strategy.

Jeff Johnson, CFA

July 9, 2020




If you think this market is crazy volatile, then you are right.  The market fell into a bear market (down -20%) faster than at any time in history, even including the Great Depression.  The daily price moves looked more like an out-of-control roller coaster than a rational, orderly market.

Considering this manic behavior, you have to wonder where are the grown-ups?  You also have to ask why investment people making the big bucks can change their minds so quickly and erratically.  Where’s the conviction?  Disciplined or fickle?

The COVID-19 pandemic has been called a Black Swan-a hard to predict rare event that comes as a complete surprise and has a major effect.  It has been characterized as a Known Unknown, and it has been a trigger for the market volatility and downdraft.  There have been a number of other factors that combined, however, to cause a “Perfect Storm” of Volatility.

Despite the historically high volatility level, there has not been historically bad investment performance.  So far, investment performance has been similar to a typical bear market.  It is understood, that investment performance could still get worse.

The graph below shows the incredible volatility starting in March.

Listed below is the actual S&P 500 index performance.  It is down so much because there were more large volatile down days than up days.


Two key contributors to this Perfect Storm of volatility include:

-Human nature, with all the emotional euphoria on the way up and despair on the way down.

-Big, fast computers.  Algorithmic Trading, High Frequency Trading, and increasing use of momentum and volatility strategies represent the second major contributor to the volatility.  This trading was magnified by excessive financial (debt) leverage.

(Details are listed further below:)



First, it is important to keep perspective.  The main priority is saving lives.  Everything else comes back.

It shouldn’t impact your Investment Objectives:  It is important to maintain a long-term perspective.  The huge volatility in March shouldn’t impact a long-term focus.  This is not a financial crisis, but rather a crisis of confidence.  The depth and duration of the coronavirus are not known, but it does not appear to constitute the fundamental, systemic problems associated with the 2008 Great Financial Crisis.  Moreover, the massive government monetary and fiscal support being implemented is much larger and coming much quicker than in 2008.

The sudden -20% market decline has been painful (especially after 11 big years), but the decline is well within the historic range for bear markets.  The market decline should also be remembered within the context of the 31.5% gain by the S&P) 500 in 2019.  More importantly, the market will come back.

A review of Bull and Bear markets since 1950 shows:

-the average bear market declined -35% and lasted an average of 14 months.

-the average bull market gained 199% and lasted an average of nearly 6 years.

Bear markets are typically much shorter than bull markets, they go down less, and they have always given way to another bull market.

It might sound flippant, but in a way the market had gone too far too fast and was due for some downside.

It is important to remember that there are wide ranges around the average length and return of bull and bear markets.  Nevertheless, history shows that all bear markets end.

Portfolio actions that you take (or don’t take) at this point can feel highly uncomfortable but the decisions are not rocket science.  Investors have been bailing on investment holdings at a near-record pace and this is no time to be part of the herd’s stampede.  There is nothing unique about the list below, but it is supported by ample historical evidence.

-Stay the course.  Fear is really the biggest risk.

-Don’t sell unless you have a dire need for cash.

-Rebalance the portfolio to restore beaten-down equity holdings to a weight consistent with your long-term investment objectives.

-If you have cash, then add to equity holdings.  This isn’t easy, but a good strategy is to make several smaller investments over time rather than one larger trade.

– At this stage in the bear, there is likely to be far more upside than downside.  Remember that investment performance is improved by buying in bear markets, not selling.

It’s Deeper than Fear and Greed — Non-Investment Observations:

It is often said that the markets run on the animal spirits of Fear and Greed.  It’s not really that simple.  It’s too early to know the depth and duration, but here are some non-investment observations:

-It would be a mistake to bet against the resilience, creativity and persistence of Americans in this time of challenge.

-Health care workers are showing incredible dedicated service despite personal risk and sacrifice and are a true inspiration.  This is especially true for the nurses who have the most frontline exposure.

-Essential workers are taking on a new meaning as we see who really is essential.

-Human ingenuity from both the government and the private sector are working furiously and there are good reasons to remain optimistic.

-Many companies are forgoing profits and are keeping employees or paying what they can.

-The general public is showing impressive broad-based acceptance and support for social distancing and quarantines.  It has changed lives, but everyone seems to recognize that we are all in this together.

-There are uncounted and often un-noticed acts of helping and compassion that add up to something much bigger.

When considering all this, I am reminded of Genesis 1:27 where it says that we are created in the image of God.  It is gratifying to see humanity set aside mundane differences and rise up to face this challenge.  These are the times that bring out the best in all of us.



Human Nature-Complacency and then Panic:

Investors received stellar performance during the longest bull market in history, 11 years, and this was accompanied by the longest economic expansion in history, a stretch that ran for 10.5 years.  For years, investment performance ratcheted upward, causing a sense of complacency.  Central banks around the globe kept interest rates low, and encouraged investments in riskier assets.  Investing was characterized by the Fear Of Missing Out-FOMO.  With this benign backdrop it is little wonder that the sudden recognition of the coronavirus was a major factor that upset the apple cart and caused such volatile emotional selling.

Economic prospects-V-Shaped Recovery, or U, or L:  Epidemics historically cost lives but have not had big longer-term impacts on markets or the economy.  This time it looks different.  The speed and suddenness of the global shutdown is unprecedented and economists and others are only gradually beginning to understand the magnitude of this change and then to incorporate this into their models.  For example, Goldman Sach’s initial analysis of COVID-19 impact foresaw minimal impact to the U.S. and they saw 1.2% US GDP growth for 2020.  A subsequent forecast revised U.S. 2020 economic growth to 0.4%.  As of March 21, Goldman has significantly revised their 2020 GDP growth rate down to -3.8%.  This forecast includes a -24% annualized negative growth rate for Q2 and then a sharp Q3 recovery of 12% annualized and Q4 gain of 10%.  This analysis sees a V-shaped recovery.

The point is not to throw rocks at Goldman Sachs, because they are smart, savvy investors.  The point is that analysts are increasingly negative about near-term prospects.   Further, it warrants caution regarding how much we really comprehend about the coronavirus impacts.  Given the unprecedented nature of the shutdown, it seems that there may be more caution by both consumers and companies as we emerge on the other side and a U-shaped recovery is more likely than a V.  Finally, the coronavirus outbreak may prove to be worse than the 9/11 terrorist attacks, but it doesn’t look to be as severe as the full-blown 2008/2009 Great Financial Crisis.

COVID-19 Backdrop:  As 2020 began, investors were optimistic the economic expansion would continue, as calming trade tensions between the U.S. and China and three 2019 interest-rate cuts from the Federal Reserve lifted stocks.  The coronavirus was widely publicized by mid-January, but it was first ignored and markets went on to post all-time record highs by February 19.  For years, it paid to buy each dip in stocks and to embrace trades that bet against the return of volatility.  Then the COVID-19 virus became increasingly problematic and ultimately caused an unprecedented global shutdown.  Millions of the nation’s businesses suddenly closed their doors, international travel ground to a sudden halt, and personal interactions were sharply curtailed.  Markets reacted negatively with unprecedented volatility.  As the severity of the situation became increasingly apparent, economic and earnings forecasts were repeatedly revised down lower and lower.  The transition from complacency to a sudden, unprecedented global shutdown caused a huge emotional reaction and produced panicked selling.


Algorithmic trading was the other major factor in the huge March volatility.  Algorithmic trading essentially involves computer programs that follow defined sets of instructions (algorithms) to do stock trading far faster than humans can do.  It often utilizes back-testing of technical indicators like movements of 50-day and 200-day moving averages, trend following patterns and arbitrage opportunities based on pricing anomalies.

Algorithmic trading is different from fundamentally driven trading that is based on rigorous analysis of company valuation and revenue and earnings growth prospects.  Instead, “algo” trading looks for relatively small market dislocations and inefficiencies that can be rapidly exploited with strategies related to volatility, momentum and risk parity.  Quite simply, it’s not based on strong company earnings growth or an attractive valuation level.  Analysts at J.P. Morgan said “fundamental discretionary traders” accounted for only 10% of recent stock trading volume.  Goldman Sachs analysis shows equity algorithmic trading is nearly 3 times the level from 15 years ago.

High Frequency Trading-HFT:  Algorithmic trading is often based on High Frequency Trading (HFT) that utilizes powerful computers moving in and out of markets at lightning speeds measured in milliseconds.  In normal markets HFT adds liquidity and lowers costs by reducing bid-ask spreads on trades.  In March, however, profits at the large HFT algorithmic traders were reported to be extremely high, and there is now a question about the value of HFT in times of market duress.

Volatility Trades:  The 11-year bull market was accompanied by a below-average level of price volatility.  In this environment, hedge funds and other institutional investors utilized a variety of algorithmic strategies to trade on small changes in market volatility, regardless of whether they went up or down.  Since price volatility was low, many of these strategies used financial leverage at up to 10X.  As markets moved up, low volatility caused traders to buy risky assets.  As markets fell, volatility rose and the computers began selling.  As a result, during March this computer-based trading magnified both moves upward and downward.  In another example, investment strategies were established by market participants to either dampen volatility or enhance returns based on previously reliable relationships between assets.  Unfortunately, these pricing relationships fell apart when volatility spiked and caused devastating effects in panicked markets.

Six Sigma:  The Wall Street Journal reported prices gyrating by an incredible six standard deviations from the short-term norm.  These moves were exacerbated by the presumed low likelihood of extreme market moves with risk models largely based on a period of relative market calm. Since many of these trading strategies were structured with high financial leverage, it became a situation where everyone headed for the exit at the same time.  It is easy to see how unwinding these trades caused such panicked selling.

Momentum Trades also benefit from Algorithms:  Momentum trading is an investment strategy that has a good historic track record.  Momentum traders buy the stocks that are going up the fastest.  Or they might buy the stocks that have the greatest revenue or earnings momentum.  Regardless, this feeds on itself and the more momentum traders, the more it spirals upward.  When markets (or stocks) reverse and head down, then momentum traders are selling the assets that are falling the fastest.  They essentially turbocharge the upward buying interest and then magnify the downward selling pressure.

Fundamentals prevail over Algos on a long-term basis:  Since Algorithmic trading is focused on short-term factors like volatility and momentum, it has less relevance to fundamental factors.  Fundamentals still function to differentiate the merits between various companies and future prospects, and fundamentals still determine the long-term performance of investment assets.  What this means to a long-term investor is that algorithms probably reduce trading costs by a small amount during normal market activity, but a disciplined investment process still prevails on a long-term basis.

Liquidity Dried Up:

Liquidity in the financial markets means the ability to sell an investment asset quickly without having to sell it at a big discount.  Liquid investment assets usually have a large number of buyers and sellers readily available so that a transaction is easily traded and it minimally impacts the price.  US Treasury securities normally have the greatest liquidity.  Your house is far less liquid.  The sudden shutdown of the U.S. economy was unprecedented and it precipitated an immediate dash for cash.

Dash for Cash:  Individuals suddenly faced unemployment or reduced hours, particularly in the airline and entertainment industries. Businesses, seeing markets and revenue shutting down, drew down bank credit lines.  Small business owners were particularly vulnerable because they typically lack the financial flexibility of larger firms.  Fund managers faced redemptions as investors liquidated holdings.  Traders attempted to unwind trades that had worked in a low volatility investment environment.  In many of these cases, normal cash flow patterns were disrupted and caused an immediate need for cash.

US Treasuries & Gold-Traditional Safe Havens Didn’t Work:

US Treasuries prices typically rise (and yields drop) when investors seek a safe haven.  This time, Treasurys dropped the at the same time stock prices were dropping, so there was no safety anywhere.

The Treasury market was disrupted by other factors as well.  For example, even short maturity Treasury securities (due in 30 days or less), sold off because people wanted cash, NOW!

Gold is another asset the investors buy in scary times, but gold actually declined at the same time that the stock market began falling.

Risky Assets were Crushed:

With fears of an imminent recession, investors fled riskier debt, afraid companies that loaded up on credit amid low interest rates would have trouble repaying.  These assets became extremely illiquid, and the only way to unload them was to sell at a huge discount.  As an example, the high yield (junk bond) Exchange Traded Fund- HYG quickly fell 15%.  Somewhat ironically, investment managers during times like this are typically forced to sell their highest-quality assets because the discounts on lower quality assets are so extreme.

Short Covering:

Short covering is often the cause of markets spiking upwards.  A short trader essentially uses a derivative security to sell an investment asset today with the provision to buy it later before a specified date.  For example, a short trader hopes to sell a stock today for $100, and buy it in the future at $90, a lower price.  This can be extremely risky, but it can be lucrative.  When the market is going up instead of down, this trade becomes increasingly unprofitable.  You have already sold at $100, and now you have to buy at perhaps $110 or more.  As the market goes up, short traders have to sell (Cover) before they lose even more money.  A large number of short sellers covering (closing out their increasingly unprofitable trade), means prices go up even higher.  This was a part of the reason that the S&P 500 went up 9.4% on March 24.  Many times, large upward price moves are caused by short covering.

Margin Calls:

Investors are allowed to borrow money in their brokerage accounts to buy even more stock.  This works great in rising markets, and it made you feel like a rock star in 2019 when the S&P 500 went up 31.5%.

When stocks decline, investors are required to put in more collateral.  They need to add to their margin account.  When they don’t have the cash, their broker will liquidate some of their securities to re-establish their required margin.  This is a “Margin call”.  Obviously, the more selling pressure in the market place, the greater the number of margin calls and this results in a negative downward spiral.  Margin calls were a major negative factor in the 1929 stock market crash.

Final Comments:

These Cornerstone blog posts are designed to provide education and a long-term perspective related to investments.  The commentary relies on my career experience, credible sources and hard data as much as possible. Even so, there are always many surprises and unexpected outcomes and this certainly applies to the comments listed above.  As always, your feedback is helpful and beneficial.

Jeff Johnson, CFA

April 1, 2020