The Changing Seasons

Market Commentary | January 7, 2022

“To be interested in the changing seasons is a happier state of mind than to be hopelessly in love with spring.”
– George Santayana

January brings the annual tradition of envisioning the year ahead. For individuals, this often includes New Year’s resolutions to change patterns in their personal lives. In financial markets, analysts and pundits have a different challenge – attempting to predict what they cannot control. It is human nature to predict that life and patterns will continue in some form of the status quo; economic forecasters are not exempt. Their predictions about market performance usually extrapolate from current trends and recent history, often assuming a linear path of growth or decline. This “recency bias” is inherently ill-equipped to consider new factors or novel changes.1
Despite countless examples of market forecasts being off the mark, the annual tradition continues and major financial institutions publish their version of the future. At North Berkeley, we are “interested in the changing seasons” as George Santayana put it. Rather than relying on the hubris of an annual forecast, we focus on a process of portfolio rebalancing that assumes that the economy and markets will change in unknowable ways. This allows our clients’ portfolios to stay aligned with their long-term goals, even when the temporary bounty of spring is causing other investors to rationalize taking on additional risk.

The Recency Bias of 2021

In 2021, the S&P 500 rose by 28% and closed at a new record high 70 times during the year. Stocks in developed international markets rose by 11% and US real estate funds grew by a whopping 39% after the declines of the prior year. Additionally, proceeds from company IPOs within the US totaled $118 billion, nearly double the previous record. It would be easy to assume that the underlying economy is roaring and the growth will continue in 2022. Markets aren’t that simple. Factors from rising interest rates to new risks that we can’t anticipate will influence markets in yet unknown ways in the year ahead.
Each year the World Economic Forum publishes a list of the biggest risks in the coming year based on input from business, political, and thought leaders. At the start of 2020, infectious disease didn’t make the list. Less than three months later, COVID-19 had disrupted financial markets and daily life around the globe. At the start of 2021, inflation didn’t make the list. It became arguably the primary risk for markets during the year and a direct factor in shifting Fed policy.
Envisioning and preparing for novel risks is difficult, but as we discussed in our recent commentary Planning While the World is in Flux, the act of planning can help create resilience when the unexpected occurs. This year, investors’ recency bias may fuel beliefs that stocks with significant growth over the past year will continue that trend, or that any market decline that emerges will continue indefinitely. If we revisit headlines in March of 2020 or during the 2008 financial crisis, we can find countless predictions of a complete collapse of our financial systems.2 As time passed and perspective emerged, investors in those moments were reminded that the recent past is a poor indicator of future market performance. Remaining invested through both market highs and market lows ultimately yields the best outcomes.

It’s Not Always Spring

Annual forecasts often tempt investors with rosy views of bountiful asset growth in the year ahead. Beyond the desire of the authors to garner clicks on sensational predictions, it is true that equity markets grow more frequently than they decline, making growth a more probable outcome. That process isn’t linear though. Periods of irrational exuberance have pushed market prices to unreasonable heights before and will do so again in the future – momentum and optimism can be a powerful combination.
A prime example during the pandemic was the significant stock price growth of companies that supported remote work. Video conferencing, telehealth and electronic document signing had booming demand. Zoom Communications (ZM) saw its stock price increase by 700% by the fall of 2020 on forecasts that business meetings had permanently shifted to virtual. Over the ensuing twelve months, the stock lost more than half of that growth as people realized the present pandemic landscape wouldn’t last forever.
Similarly, DocuSign was heralded as a perfect solution for an era of social distancing, and the stock increased by more than 300%. The earnings growth didn’t materialize at the scale investors were hoping for, and the stock declined more than 50% from its high. Conversely, airline and energy stocks were pummeled in 2020 on the belief that travel would be permanently disrupted. These became two of the most favored sectors in the re-opening narrative of 2021. Timing the rotations of individual stocks cannot be done reliably, which is why we favor diversified market exposure.

Cycles of Growth

Looking at the market more broadly, we have had three years of strong price growth in equity markets, with the S&P averaging a 25% increase. As the global economy has struggled for nearly two years with pandemic-related obstacles, low-interest rates and government largesse have helped stock prices soar. Only 20% of that increase was due to actual earnings growth; fully 80% has been through expansion of market multiples or the expectation of future earnings growth.3 In other words, investors are becoming more optimistic – and perhaps unrealistic – about companies’ ability to grow earnings at a faster pace.
Over the long term, markets reward companies that build strong profitable businesses with quarterly results that back up their growth projections. In the short-term, recency bias and the uncertainty of a continually changing landscape can distort investors’ ability to evaluate company forecasts. With today’s high multiples, even if the economy continues to grow, it is possible to see market prices decline. The unknown continues to be a factor, and we will not be surprised to see new patterns emerge in 2022.
Building on our theme of changing seasons, we recognize that winter is an important part of the natural cycle. Winter is a time of dormancy, regeneration of nutrients in the ground, and replenishing the water table. In economic and market cycles, price declines bring market expectations and current business prospects into better alignment. Prices adjust to more reasonable valuation levels, and the stage is set for a new cycle of growth to emerge.

Good Process > Bold Predictions

When managing investment portfolios or making New Year’s resolutions, a key element is understanding what we can control. It is pointless to make a New Year’s resolution to win the lottery or to invest for double-digit gains. These outcomes are outside any individual’s control.
In our work with clients, we focus instead on the unique questions related to their families and lives as well as regular rebalancing of portfolios. By regularly rebalancing we can ensure that we are buying low (by adding to underweight positions) and selling high (by trimming stocks with recent gains) and that we aren’t falling victim to the siren calls of recency bias and current market exuberance. Pruning the portfolio also allows us to respond to the unexpected in clients’ lives, creating liquidity when needed and managing tax liabilities.
Heading into 2022, we expect that major themes of the coming year will include the Fed’s pacing of interest rate hikes, whether inflation remains stubbornly high or retreats, and whether COVID-19 officially trends toward a less disruptive endemic phase. We also expect that when we write a similar reflection at the end of the year, there will also be major storylines that aren’t even on our radar at this point. For this reason, we will continue to build resilient portfolios and prioritize good process over bold predictions.
We wish everyone a healthy, happy, and prosperous New Year! Please be in touch with any questions, and we look forward to our next conversation.


1 In behavioral economics, the recency bias (also known as the availability bias) is the tendency for people to overweight recent information or events without considering the objective probabilities of those events over the long run. Investopedia

2 Headlines from the darkest days of the financial crisis. Business Insider

3 Breakfast with Dave, January 7, 2022.

Brian Kozel, CFP 

About Brian Kozel, CFP®

Brian Kozel is a Partner at North Berkeley Wealth Management. Brian helps clients feel confident as they navigate their financial journey.

Read more about Brian

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This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

By |2022-06-30T11:41:54-07:00January 7th, 2022|