“The Only Constant in Life is Change” – Ancient Greek Philosopher, Heraclitus

Heraclitus, born circa 535 BC, was notable for his philosophy on ever-present change in life. He was credited with the phrase: Panta Rhei, meaning “everything flows.” Change surrounds us in our personal lives and certainly our financial lives. Change can be hard at times, as we naturally seek to find certainty in the unknown.

As with most quarters, we witnessed several changes in the financial markets. The U.S. stock market gained 11% during the fourth quarter, while international stocks returned 2%. Real estate returned 15%, while commodities gained 1.5%. The broad U.S. bond market was the outlier with virtually no change, returning just 0.01%. The S&P 500 level finished the year at 4,766, and the 10-year U.S. Treasury Bond, if purchased at 2021 year-end, would yield 1.52% per year for ten years.

The onset of COVID-19 variant Omicron appeared to slow down the economy, as witnessed in consumer spending trends and the job market. The job market continued to improve, however slower than expected. The forward-looking stock market appeared to look past employment headlines, as shown by the strong results during the fourth quarter.

Inflation remained front and center in the U.S. economy and indeed for Federal Reserve (Fed) officials, who influence monetary policy. Increases in inflation, thought of simply, are the result of too many dollars chasing too few assets. The Consumer Price Index (CPI) showed a gain of 7.04% compared to the prior year. This gain was the largest increase in this broad inflation basket since the early 1980s.

The rate of change in inflation is important for evaluating financial markets. Conversely, as consumers, we tend to pay more attention to the rising absolute cost of goods and services. Changes to our purchasing power impact our emotions, pocketbooks, and spending patterns. The rising inflation landscape led the Fed to move more aggressively to help keep a lid on inflation levels. We expect the Fed to help control inflation in 2022, focusing more on increasing short-term interest rates.

How do we as investors defend against inflation and help preserve our purchasing power into the future? Stocks and other assets more finite in supply have historically countered the impact of inflation over long periods. However, owning stocks doesn’t come without embedded uncertainty in the short term. Therefore, we advocate finding a balance between the short-term uncertainty of owning stocks, for example, and the long-term ability to offset reduced purchasing power due to inflation.

We believe there are many parallels between wealth management and the notion of constant change. Inflation is just one aspect of change you will experience throughout your financial life. Remember, “everything flows.”

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