Investing has long been built on conventional wisdom, based on trends and an understanding of how the economy behaves, how our financial lives evolve, and how our government works. But in the wake of a historic pandemic and its subsequent economic upheaval, 2021 defied conventional wisdom. Markets recovered at a far stronger and more sustained rate than expected, while still swinging through periods of volatility. Interest rates stayed low despite rising inflation, while an anticipated hike in taxes for higher earners has yet to materialize. And while progress has been made in fighting back COVID-19, the pandemic still looms over the economy.
So why has conventional wisdom not been as conventional over the past twelve months? And should it change how we think about investing into 2022 and beyond?
An unusual recovery
Previous recessions, such as the 2008 financial crisis, have been defined by a sharp economic decline, followed by a slow and steady recovery primarily driven by changes in monetary policy. For portfolio managers, that usually necessitates a wait-it-out approach for losses to be recouped and confidence to be regained — an approach that typically pays off in the long run.
But the 2020 recession was not typical. The nature of the pandemic meant that recovery looked far different from what we’ve seen in the past: much faster, much greater, and more dependent on non-financial factors, such as the development and uptake of vaccines and the easing of public health restrictions.
So the pain experienced by many investors due to the March 2020 downturn was quickly reversed as markets hit new highs throughout the year.
An unorthodox regulatory approach to inflation
The rapid nature of the economic recovery combined with significant government stimulus programs were expected to have an anticipated impact on inflation. Conventional wisdom would then suggest that an interest rate hike was imminent.
As the inflation rate began to rise however, the anticipated interest rate hike did not materialize, as the Federal Reserve appeared to be more comfortable with the prospect of full employment than it had been in previous periods. At the same time, a pandemic-driven supply chain crisis took hold, driving up consumer prices and resulting in some of the highest inflation rates since the 1970s.
Facing an inflationary environment that was harsher than expected, positions in portfolios had to be re-evaluated based on clients’ lifestyles and needs rather than waiting for action from the Fed to calm rising prices.
A looming, unpredictable force in the pandemic
Driving much of this unorthodoxy has been COVID-19, which continues to dominate our economic reality as we enter the third year of the global pandemic. Unlike typical market externalities, the pandemic’s impact on our lives has been unpredictable with new variants and vaccine developments having a major role in how our economic growth plays out.
Conventional wisdom in investing provides us with a typical blueprint to follow for coming out of an economic downturn. However, the unique and widespread nature of COVID-19 has upended much of that thinking, instead creating an ongoing state of volatility that has undermined a year of rapid economic growth.
Can we still rely on conventional wisdom in ’22 and beyond?
Looking back on 2021, markets and the larger economy did not behave as many would have expected. That raises questions over whether we need to rethink many of our assumptions about how they operate. As we look more closely, it can be argued that what surprised us most was the scale and rate of change rather than the changes as a whole.
The most important piece of conventional wisdom for portfolio managers is that a long-term view is needed during times of economic crisis, and that any short-term losses can be recouped over the long term. This still applies to the recovery of 2021, just at a much faster pace and with more inherent volatility than after previous economic downturns.
Interest rates and inflation should also take a more predictable turn in 2022. All indications are that one of the major inflationary pressures, the supply chain shortage, is beginning to abate as we begin the new year, and analysts predict an eventual interest rate increase in mid-2022. That means portfolio managers can take a more orthodox approach in forecasting and adjusting their clients’ portfolios.
Fundamentally, 2021 demonstrated that the best financial plans are created to be resilient, managed with flexibility, and built with trust between advisors and clients. With these crucial components, advisors can help their clients weather the most unprecedented of times to meet their investment goals.
Fundamentally, 2021 demonstrated that the best financial plans are created to be resilient, managed with flexibility, and built with trust between advisors and clients. 
This article is for informational purposes only and should not be construed as investment or legal advice. Please consult your tax advisor and/or legal counsel to determine if the strategies described above are right for you. The pandemic’s impact on our lives has beenunpredictable, with new variants and vaccine developments having a major role in how our economic growth plays out
