IMG Q1 2022 Investor Letter

Happy New Year!

From everyone here at IMG we hope you enjoyed your Holiday season and your New Year is off to a great start. 2021 may not have put all aspects of the pandemic in the rear view mirror, especially recently with the emergence of the new Omicron variant. However, investors looked through the uncertainty around Covid and the markets ended the year on a positive note. The S&P 500 achieved its third straight year of growth and corporate profits were supported by strong consumer spending. As we enter 2022, we do so with an underlying positive narrative. Inflation, at least in the short term, will continue to be a headwind the market will need to tame in 2022, but the Federal Reserve (the Fed) is moving toward the first rate hike to offset this challenge.

Before we look ahead, let’s take a moment to look back and review market and economic activities throughout 2021 from our team of experts. For additional in-depth analysis, you may view recordings of our team as they share insights on various local and national media outlets, as well as our weekly The Markets and the Economy email series at  

Key Takeaways from 2021:

  • The US Economy in 2021 turned out better-than-expected with the best GDP growth in 37 years and an improvement in the labor market
  • The S&P 500 also showed strength throughout the year amid a new virtual work world marking three straight years of double digit gains, the best three year return since 1999
  • An active year for the Federal Reserve – its latest stance took a more hawkish tone and sped up the timeline to end quantitative easing and is now prepared to raise rates several times in 2022 to combat record inflation

US Economy

While the pandemic recovery has been a bit lumpier than initially anticipated, 2021 actually turned out to be a better-than-expected year on a number of fronts including: robust equity market returns, the best GDP growth in 37 years, a significant increase in COVID-19 immunity rates, and an improvement in the labor market.

Corporate Earnings and the Stock Market

The S&P 500 finished up 28.7% for the year marking the third straight year of double-digit gains. This was largely driven by better-than-expected and record-high year-over-year estimated earnings per share growth of 45.1% (according to Factset estimates). In 2021, companies were lapping weak 2020 comparisons, consumer demand continued to rebound, and companies found innovative ways to reduce costs in this new virtual environment.

Return To “Normalcy” and Immunity Rates

There was a faster than expected return-to-“normalcy” throughout the first two thirds of the year as vaccination rates improved and confirmed case counts significantly dropped. This allowed economies to largely re-open across the globe and discretionary spending in areas such as travel and entertainment began to pick up. However, in the last third of the year some restrictions were put back in place as case counts began to rise due to the Delta variant. While we are currently facing another spike in case counts due to another variant, Omicron, the level of immunity significantly increased in 2021 as vaccination rates increased and natural immunity from the virus continued to develop. While evidence suggests Omicron is more contagious than the Delta variant and it spreads more easily than the original virus, protective measures (i.e. oral antiviral for treatment of COVID-19) have been put in place in the hopes of reducing significant fatality rates.

Labor Market 

We saw significant improvement in the labor market over the course of 2021. The unemployment rate fell from 6.7% at the beginning of the year to 3.9% in the most recent reading. In addition, wage growth has been rising at annualized rates not seen since the 1980s. While that can put greater pressure on corporate profits, it can also increase household discretionary income levels.

Economic Data Points We Are Watching Closely in 2022

  • Fiscal Stimulus: Pandemic stimulus programs added over $5 trillion dollars to the economy and accelerated the recovery. The government continues to negotiate additional stimulus into areas such as infrastructure, however it is important to note that these are decade-long proposals financed in part by tax increases, so the level of stimulus from additional programs is unlikely to be anywhere near as accommodative as what we have seen from already implemented programs.
  • Labor Supply: Labor supply was challenged as enhanced unemployment benefits, lower immigration rates, higher costs of child care, and fears of COVID-19 resulted in a shortage of workers. Workers also continued to quit their jobs at a record rate in November, while job openings stayed close to record levels. This had a disproportionately bigger impact on lower-wage sectors such as retail, leisure, and hospitality. As we move past the pandemic we expect that some of the pandemic-related effects on the labor market should recede.
  • Inflation: Inflation heated up in 2021 as surging consumer demand was met head-to-head with supply shortages. As company’s costs rise, many attempt to pass these costs onto consumers which can send inflation even higher. While there are elements of the current inflation wave that could be transitory in nature (e.g. those related to supply chain issues), there are other elements of inflation such as wage growth and rising home prices/rents that have potential to persist for longer.
  • Interest Rates and Equity Valuations:  Inflationary pressures have caused the Federal Reserve to take a more hawkish (aggressive) stance towards monetary policy. There is the potential for three rate hikes by the end of 2022 based on the Fed’s announced plans. One way to value stocks is to discount the future expected cash flows of the business at a discount rate. If rates rise, those future cash flows would be discounted back at higher rates which could result in declining equity valuations.
  • Corporate Earnings: Companies will face tougher financial comparisons in 2022, wage and input costs could remain elevated, rates are poised to move higher, and corporate taxes could increase which could be a headwind to profit growth. However, consumer balance sheets remain strong and businesses are re-building inventories which could offset this pressure.

Traditional Asset Class Returns Q4 2021

Asset Class Benchmark Q4 2021

US Stocks

S&P 500



US Gov’t Bonds

BbgBarc US Govt Intermediate




BbgBarc US Treasury Bill 1-3 Mon



US Stocks

2021 was the 10th best calendar year for US equities in the past 50 years. The S&P 500 closed 70 days at record highs, just shy of the 1995 record of 77 days. The S&P 500’s 28.7% return in 2021 was on top of an 18.4% return in 2020 and 31.5% return in 2019, resulting in a three year compound annual return of 26.1% per year! This is the best three year return we have seen since 1999 and the 8th best three year return we have seen dating back to 1926. In addition, 2021 was a year of short and shallow sell-offs and low volatility. The index amazingly experienced no pullbacks greater than 5% throughout the year as investors shrugged off risks such as the Delta variant, supply chain disruptions, and inflation concerns.

From a sector standpoint, cyclical and rate-sensitive sectors such as Energy (+54.6%), Real Estate (+46.2%), and Financials (+35.0%) led markets higher. The Industrials (+21.1%), Staples (18.6%), and Utilities (+17.7%) sectors all had double-digit returns.

From a market capitalization standpoint, Large and Mid-Cap stocks (Russell 1000 +26.5%) significantly outperformed Small Cap Stocks (Russell 2000 +14.82%) in 2021. From a style perspective, Large Cap Growth stocks (Russell 1000 Growth +27.6%), or stocks that are expected to grow sales/earnings faster than the market but tend to trade at higher valuation multiples, slightly outperformed Value stocks (Russell 1000 Value +25.2%) stocks in 2021. However, Small-Cap Value stocks (Russell 2000 Value +28.3%) significantly outperformed Small-Cap Growth stocks (Russell 2000 Growth +2.83%). Value stocks generally tend to outperform Growth stocks in periods of above-trend economic activity and rising interest rates. Value stocks recovered in the first half of 2021 outperforming Growth stocks, however declining interest rates and fears of the Delta variant caused investors to pile back into Growth stocks in the back half of the year. 

US Bonds

The 4th quarter of 2021 featured many of the same headlines impacting the fixed income market we have seen throughout the year including COVID-19, virus variants, inflation, and the Federal Reserve’s monetary policy. There was an added element of volatility plaguing investors this quarter with the possibility of the US Government reaching its borrowing limit if Congress could not reach a deal to raise the debt ceiling. A deal was ultimately reached in December, but prior to the deal the chance of default weighed on the yield curve, particularly within short US Treasury Bills.


In a year in which the Federal Reserve was left putting out fire after fire, we saw flattening in the yield curve as rates increased particularly in the intermediate range where bonds are more sensitive to the outlook of interest rates set by the Fed. During the quarter, we witnessed a sharp pivot in the Fed’s stance as it took a more hawkish tone at its December meeting and sped up the timeline to end quantitative easing and is now prepared to raise rates several times next year to combat record inflation.  

Across the fixed income spectrum returns were mixed for the year. As bond yields moved inversely to prices, we saw negative returns for those asset classes which have stronger links to interest rates and positive returns for those more correlated to credit and inflation. The strongest fixed income performers for the year were high yield debt and Treasury inflation protected securities (TIPS), with both asset classes returning over 5% for the year.

Diversifying Asset Classes

Although strong on an absolute basis, on a relative basis equity diversification was challenged both in the 4th quarter and full year 2021. There were only a handful of diversifying equity asset classes that outperformed the S&P 500 this year- Mid Cap Stocks, Real Estate, and MLPs.

Fixed income diversification, however, was strong in the 4th quarter and for the full year 2021. Nearly every diversifying bond asset class outside of International and Emerging Market bonds outperformed this year.

Asset Class Benchmark Q4 2020

Foreign Stocks




Emerging Markets Stocks

MSCI Emerging Markets



US Mid Cap Stocks

Russell Mid-Cap



US Small Cap Stocks

Russell 2000








Bloomberg Commodity




Alerian MLP



Managed Futures

Credit Suisse Mgd Futures Liquid TR



Foreign Bonds




Emerging Market Bonds




US Inflation Protected Bonds

BbgBarc US Treasury TIPS



Floating Rate Loans

Credit Suisse Leveraged Loan



US High Yield Bonds

BbgBarc US Corp High Yield



Convertible Bonds

ICE BofAML Convertible Bonds




While forecasts for the end of the pandemic have been clouded by variants that appeared this year, there is hope it evolves into an endemic disease. We reflect on 2021 with appreciation for another year of strong stock market returns. As we look forward to 2022, we are hopeful it will become the year we can live with Covid versus living in fear of it. Inflation remains a wild card, but any impact to the stock market and economy will continue to be monitored and reported to you as always with an eye on protecting your financial future. In the meantime, stay safe. Our team is always available to answer any questions and we remain committed to ensuring your investments are appropriately positioned and well-diversified so you can meet your financial goals.


David B. Smith, CFA

Chief Investment Officer

Investment Management Group

Not Insured by FDIC or Any Other Government Agency / Not Rockland Trust Guaranteed / Not Rockland Trust Deposits or Obligations / May Lose Value