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2021 Year in Review

The year 2021 started with an explosion in meme stocks, these are stocks that gain popularity with retail investors through online communities. In January we saw a concerted effort by retail investors to go after stocks that were heavily shorted. GameStop (GME) shares went from ≈$20 spiking to $347+ in a matter of days and AMC Entertainment (AMC) shares went from ≈$2 to $19+ in days, while on the verge of bankruptcy. These are a small sample of stocks with massive price swings at the start of the year, where brokers such as Robinhood, TD Ameritrade, and others shocked the industry by restricting trading of these stocks. The large media coverage of retail options traders was brought to the forefront.

Inflation might be the biggest storyline of the year. The consumer price index (CPI) rose at its highest pace since 1982 with a multitude of factors to blame for the inflation spike. Supply Chain disruptions resulting from COVID-19 appear to be the largest contributing factor to the spike in inflation. There were large rallies in commodities such as lumber, oil, and natural gas. The sharp inflation rise left investors desperate to find good yield to keep pace with 6% inflation. A surprising laggard this year was gold, gold was down by ≈5% this year. Historically gold is one of the best hedges against inflation; this year was the exception.

The U.S. stock market had another outstanding year with the S&P 500 up over 25%. With both fiscal and monetary policy being very accommodative this has helped further the rally in equity markets. The NASDAQ slightly underperformed the S&P 500 with a 19% gain and the equity market is ending the year near all-time highs after having a somewhat turbulent December with the fear of the OMICRON variant.

The ten year note is ending the year around 1.45% after starting the year at 1%. A sharp rally of rates in February through March have since slowed down, ending the year less volatile. Investors holding a good size allocation in bonds saw sizable drag from this year as prices depreciated. A 60/40 portfolio of 60% stocks and 40% bonds returned roughly 15% this year which is a drag of 10% based on the S&P 500 returning 25%. Once again, bonds continue to be very expensive holding in a portfolio.

Cryptocurrency had another extremely volatile year. In Q1 Tesla (TSLA) announced they were going to hold $1.5B of Bitcoin (BTC) in their reserves and start accepting BTC as a form of payment. Bitcoin (BTC) saw an increase of 75% YTD while Ethereum (ETH) saw an increase of 450% YTD. Both cryptos remained highly volatile throughout the year. The argument that cryptos are a hedge against inflation still needs time to play out since the majority of cryptos are still in their infancy. Currently cryptos appear to strongly correlate to equity markets; when equity markets sell off, cryptos have seen large drawdowns.

As we look forward to 2022, all eyes are on the Federal Reserve (FED) to see if they can control inflation. The FED is ready to raise rates multiple times next year, as well as continue to slow asset purchases. Will fiscal policy be accommodative enough to overcome the tightening of monetary policy to keep the bull market roaring? Will our economy continue to roll along if we are hit with another COVID-19 variant? Are inflation fears overblown or will inflation remain persistently high? Is your portfolio built so it can handle all of these uncertainties? If the last two years taught us anything, it is to expect the unexpected.

Convexity Investments LLC | Naperville, IL |

Convexity Investments LLC is a registered investment advisory firm. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Past performance is not a guarantee of future performance.

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