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Whistling Happy Tunes in 2021

For much of 2021 it seemed like investors were just whistling “Walkin’ in the Sunshine” by Roger Miller and quickly forgetting the ‘worries and woes’ of the pandemic, inflation, the Fed, geopolitics and a host of other concerns. At least here in the US, 2021’s risk-on attitude didn’t let up for more than a few trading days at a time! Heading into a new year, there’s a general sense of shifting winds. So, let’s talk about 1) market highs, 2) valuation differences within the stock market, and 3) inflation. We’re here to walk with you through all that 2022 could bring and help you stay focused on the long-term trajectory of your financial plan.

Market Highs

You know it’s been a great year when the S&P 500 hits 70 new all-time highs! That’s the second most in S&P 500 history, only behind 1995’s 77 new highs. (This won’t be the last time the bull market of the 1990’s comes up.) Rising markets elicit both investor pleasure and anxiety. To quote DFA VP Weston Wellington’s year end commentary, investors “may be reluctant to make new purchases since the traditional ‘buy low, sell high’ mantra suggests committing funds to stocks at an all-time high is a surefire recipe for disappointment.” As he points out in the chart below, history would suggest otherwise:

Surprising? Rationally though, this makes sense since stock prices have increased over time and therefore new market highs must be reached on a consistent basis. Investors provide capital to companies with the expectation of positive returns over time. Whether it’s amid a recession or after an incredible rally, that long-run expectation remains the same. Our advice is to get new cash working for you in the markets as fast as you’re comfortable with, and to focus on the long-term results of diversified investing rather than short-term volatility.

Valuation Differences Within the US Stock Market

Hitting new all-time highs so frequently brings up another question: is the entire US stock market at a “lofty” stage, as some would say, or are there areas within the market with dramatically different valuations? According to most financial measurements, value-style stocks are reasonably priced verses historical averages. Depending on the valuation metric, US growth stocks have eclipsed their tech bubble highs. This is shown below in the price-to-book chart put together by Dimensional Fund Advisors.

When looking at this price-to-book chart, the spread (difference) between the lines is the key takeaway. Growth stocks always trade at higher multiples (the yellow line never crosses below the blue one). This is because investors are willing to pay more for companies with strong revenue and profit potential. Conversely, value-style stocks are usually “on sale” for a reason – they’re riskier. That extra risk has historically been compensated with higher returns. It’s difficult to predict when styles go in or out of favor and nearly impossible to predict it consistently across market cycles. Nevertheless, mean reversion is a powerful force and it’s unlikely that a growing valuation spread can continue indefinitely.

At Boardwalk, we recommend holding both growth and value stocks but incorporating a tilt away from growth stocks and towards value stocks due to their expected excess return over the market at any time, not just because of their current valuation spread.


The December inflation data was recently published and shortly dominated financial headlines everywhere. Up 7% from one year ago, it’s the largest Consumer Price Index (CPI) bump since 1982. Alarming for all investors, we featured an in-depth spotlight on inflation during our last quarterly commentary and wanted to provide a few key updates.

First, equities are the best long run hedge against inflation even if prices reflect investors’ jitteriness in the short-term. Stocks handily beat this year’s inflation figures. Additionally, we include commodities (+27.1%) and global real estate (32.5%) in portfolios, in part due to their inflation hedging characteristics.

Second, this chart from Morningstar is helpful for describing the nature of today’s inflationary environment. This data shows month-over-month inflation in excess of the pre-pandemic trends.

The combination of supply chain issues, rising labor and production costs, and high consumer demand are all contributing to rising prices. But much of the large inflation adjustments are coming from a few select categories like “vehicles,” above. Higher automobile prices account for about half of the excess inflation we’re seeing, which gives hope of much lower inflation figures once supply chain issues are resolved in that industry (and others).Third, the bond market is expecting a return to “normal” inflation levels relatively quickly. While inflation proved to be stickier than the Fed’s initially projected “transitory” stance, market participants have priced in only moderately higher inflation over 5 and 10 years than pre-pandemic. This can be ascertained by calculating the difference between the nominal Treasury yield and the Treasury Inflation Protected Securities yield. This difference is called the “break-even rate.” The 5-year break-even rate (read: expectation for inflation) is just under 3%, compared to just under 2% in January 2020. The 10-year break-even rate is at 2.5% right now. There is no guarantee the collective expectation will prove to be right, but it’s a comforting piece of information given today’s headlines.

We’re here to help you better understand what’s going on in your portfolio and to steer you toward a long-term focus. Come what may in the markets, lean on us to help you translate your ideal goals into financial plans that make sense for you (and to you).

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