2021 Year in Review
The year was full of economic and political headlines, but what do they mean for investors moving forward? Let’s take a look at the significant moments month by month followed by a hypothesis and strategy for investing in 2022.
- January: Chaos in Washington, Cryptocurrency passes $1T market cap, and meme stocks take off.
- February: Jeff Bezos steps aside, Tesla buys Bitcoin, and we have a semi-conductor shortage.
- March: Congress passes Biden’s $1.9T stimulus package and hedge fund Archegos defaults.
- April: Lumber prices take off and the U.S. sets a record for open jobs at 9.3M.
- May: Colonial oil pipeline is hacked and taken offline, while DOGE coin soared up 12,000%.
- June: G7 agreed on a global minimum tax, vaccine mandates pushed out, and inflation was up 5%.
- July: Billionaire space race ensued while OPEC reached agreement to increase oil production.
- August: The Taliban took over the palace in Kabul while the moratorium on residential evictions was removed.
- September: Chinese real estate company Evergrande looked to default on $300B, the Fed talked tapering.
- October: Global energy crises, U.S. tapped petroleum reserves, and Facebook changed its name to Meta.
- November: $1T infrastructure bill is signed and COP26 climate change bill has buy in at Scotland summit.
- December: West Virginia Senator Joe Manchin rejected the nearly $2T Build Back Better Plan.
How Did Investments Perform in 2021?
We saw hard assets like Real Estate and Farmland greatly outperform the strong stock market, while the only asset class that seemed to not experience a bull run in 2021 was gold and precious metals in general. It stands to reason, as precious metals traditionally perform well during uncertain economic times and as close as we got to that scenario (multiple times in 2021) the Fed and the stock market seemed to pull things together every time. We will see if this trend continues through 2022. Here are the annual performance results for farmland, real estate, gold, and the stock market.
- Farmland REIT: 99.64%
- U.S. Real Estate: 31.66%
- S&P 500 Fund: 23.04%
- Gold: -4.41%
Were There Any Surprises?
While not a surprise, a welcome confirmation of our strategy was the fact that royalty companies outperformed their underlying commodities, by both exceeding upside and limiting downside. You can see below the performance of the top 5 precious metal and top 5 oil & gas royalty companies, compared to the price of gold and oil respectively. While more plentiful commodities like oil & gas have traditionally not been great investments over the long term (production and demand ebbs and flows to negate each other over the long term), companies that own royalties on the production of the commodities show signs of long term growth potential.
- Top 5 PM Royalty Companies: -1.89%
- Gold: -4.41%
- Top 5 Oil & Gas Royalty Companies: 91.06%
- Oil: 36.79%
What Does This Mean for 2022?
When you take a look at the big headlines in 2021, it’s easy to get distracted. In an attempt to understand the current flowing underneath the headlines, we have identified a few key take aways.
- Increasing Commodity Prices
- Renewable Energy
As mentioned, it’s easy to get distracted by looking at the biggest headlines of the month, let alone the constant barrage of information on a daily basis in today’s information fueled economy. One of the biggest distractions over the past few years has been cryptocurrency. A welcome distraction for some investors who have seen 10X returns on some of their investments. A distraction none the less, when we consider some of the buried headlines like many countries increasing their gold reserves like never before through their central banks.
We have seen some countries use their natural resources as a financial weapon against other countries, while most of us have experienced increased commodity prices first hand at the pump and home improvement projects. Businesses that utilize commodities in their day to day activities are forced to increase prices which are then passed on to the consumer, ultimately giving us higher inflation. Restrictions on commodity extraction in the U.S. slows production while shipping restraints add to the cost of importing the same commodities. This trend won’t correct itself overnight, which leads us to believe that commodity prices will continue to rise.
Whether you agree with the renewable energy platform, it’s here and it’s significant. Raw materials will fuel the renewable energy push due to their vital importance in producing solar panels, wind turbines, electric motors, batteries, energy storage, and other integral aspects of producing and storing renewable energy. Copper and Silver are just two examples of metals that will need to increase production (and likely cost as a result) in order to further the green energy movement. Strategic exposures to these metals could yield solid returns in 2022.
Overall, as an investor, strategic diversification in asset classes beyond stocks and bonds will continue to minimize risk while exposure to real assets will continue to provide long term growth opportunities.