Market Outlook

Markets continued to set records in 2021 with the S&P 500 closing near record highs.  2021 was a tale of three stories.  In the first part of the year, markets were driven higher led by cyclicals and small caps.  Then came fears over the delta variant and a clampdown in China that led to mega cap tech being favored.  The last part of the year saw a shift to defensives as the fear of omicron led investors to seek safety. 

  • Growth set to slow
    • Market performance for 2021 was driven solely by earnings growth with the valuation of the S&P 500 trending lower. Profit margins hit record levels as companies were able to pass on some of the inflationary costs to consumers and were also able to get higher productivity with a reduced labor market.  Global PMIs also remained in expansion territory as supply chains were able to stay open even with port backlogs and closures due to covid.  In 2022 we will  see profit margins, earnings, and PMIs beginning to recede from historically high levels.  Slowing growth is still growth and we still expect a strong consumer-driven economy.
  • Geopolitics back in the headlines
    • According to reports, Russia has amassed close to 100,000 troops near the Ukrainian border. Though conflict seems unlikely (western Ukraine has stronger ties to the west and has strong anti-Russia sentiment), the ongoing tension has led to ruptures in the energy markets in Europe that have spread globally.  In Asia, China-Taiwan tensions have increased over the past few months.  Conflict in the region would crush the supply chain as Southeast Asia is a pivotal cog in the production of goods with Taiwan being an important hub for semiconductors.
  • What is China up to?
    • To recap, China began by clamping down on video game and tutoring companies for having a detrimental effect on children’s wellbeing. They followed that up by going after the biggest tech companies and “forcing” their rockstar CEOs into giving back to the community, taking them down a notch.  Next came Evergrande, one of the biggest property developers in the world, that was viewed as being too big to fail but that China is slowly allowing to fail.  China takes a hardline view to covid by locking down entire areas of the country after just a small outbreak and will not accept western vaccines which appear to be much more effective than Chinese options.  On top of all this, China has begun adding stimulus to the economy by lowering rates, the only major economy to be actively easing.  This is believed to be Xi Jinping’s way of consolidating power as he looks to set himself up to be ruler for life, breaking away from tradition.  From an investment standpoint I have read numerous times that China is now un-investable.  On the other hand, it can be viewed as Xi communicating to investors the sectors of the economy where he wants China to lead (electric vehicles, semiconductors, medical equipment, etc.).  We continue to favor emerging markets and in using active funds to benefit from these themes.


Portfolio Themes

  • We remain overweight cyclicals
    • Cyclicals performed well in the first part of 2021 but came under stress with the rise of new covid variants. We remain patient and continue to favor areas in the market that will benefit from a reflationary, reopening, and rising rate environment.
  • Underweight credit within fixed income
    • Fixed income continues to be a challenging asset class in a rising rate environment. We prefer to take less risk in credit markets and prefer to reallocate to equity markets instead.  Within fixed income we still prefer shorter duration and view treasuries as still being a good hedge during periods of market volatility.  We also see value in Emerging Market debt and Floating Rate securities.
  • Positioned for continued volatility
    • The era of predictable unpredictability is not going away and we have positioned our portfolios around this line. We have added non-benchmark diversifiers such as commodities to hedge against inflation and international small cap value to provide a buffer against domestic large cap growth.


  • Inflation
    • Inflation continues to be top of mind for many fund managers as they position portfolios for 2022. 2021 saw inflation reach levels not seen since the stagflationary environment of the 1970s.  A reflationary environment (2.5-3%) after the low inflation environment of the 2010s is what the Fed is targeting but their hand may be forced by more persistent inflation.
  • Hawkish central bank rate hikes
    • The biggest risk of 2022 for most fund managers is that the Fed makes a policy mistake. After a 2021 where the Fed was on autopilot under the guise of transitory inflation, the tune changed in the back half of the year as they admitted inflation has been more persistent than expected.  Early data from small business surveys is showing that supply chain issues are starting to cool especially as companies ramped up inventory to meet growing consumer demand for the holidays.  The Fed continues to have to walk a tight rope between going too fast in raising rates and beginning quantitative tightening or letting inflation run too hot.
  • COVID-19 resurgence
    • In the back half of 2021 we saw new variants, delta and now omicron, that have led to renewed lockdowns in China and Europe. Omicron spreads much faster than previous variants but has also been less deadly.  These temporary setbacks continue to put the reopening trade on hold where cyclicals lead the way and the generals, mega-cap tech, take a breather.


Model Changes

  • Reducing some cyclical exposure and increasing exposure to defensives
    • Moving Industrials to Neutral and Emerging Markets to Slight Overweight
    • Moving Consumer Staples to Overweight and Utilities to Neutral


  • Reducing High Yield to Underweight and increasing our Macro Opportunities fund to Slight Overweight
    • Credit within fixed income is expensive at current levels and have benefited from low default rates which can change as stimulus is withdrawn from the economy. Our macro opportunities fund will be in a position to adjust their allocation in an ever-changing environment.


  • Increase our Hedged Equity fund to Overweight and reduce our Managed Futures fund to Neutral
    • Given the likelihood of sizable rotations in most asset classes, managed futures may find it difficult to catch on to shifting trends. An options-based strategy, the hedged equity fund is better positioned to dampen volatility within our alternatives sleeve.


Written by:  Antonio Belmonte, CFA, Chief Investment Officer


These are the opinions of Antonio Belmonte and not necessarily those of Cambridge, are for information purposes only, and should not be construed or acted upon as individualized investment advice.  Investing involves risk.  Depending on the types of investments, there may be varying degrees of risk.  Investors should be prepared to bear loss, including total loss of principal.  The strategies discussed herein are not designed based on the individual needs of any one specific client or investor.  In other words, it is not a customized strategy designed on the specific financial circumstances of the client.  However, prior to opening an account, Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model.  You are also provided the opportunity to place reasonable restrictions on the securities held in your account.