top of page

Invariant CIO 2021 Year End Letter

Happy New Year! As Invariant enters its ninth year, we are grateful to have the opportunity to serve a growing number of individuals and advisors and are excited to welcome new members to our team.

If you are looking for a trusted financial advisor with an experienced investment team to give you clarity and confidence in your financial life, give us a call: 717-317-9006.

Markets and Portfolios


Stocks went out on a high note to end 2021. After an initial fear-driven response to the Omicron variant, markets managed to recover those losses in December and go out near all-time highs. The Dow was up about 21% for the year. Commodities, real estate, and technology shares topped the leaderboard with some of the strongest returns.

International shares, particularly emerging markets, underperformed significantly, but Invariant remains cautiously optimistic on their prospects for 2022. According to Bespoke, on a price to earnings basis, U.S. stocks are trading at a nearly 50% premium to the rest of the world compared to an average of 4% over the last 25 years. The only time this ratio was higher was in this midst of the financial crisis in 2008.

While the indices experienced only a ~5% correction once last year, there was much consternation under the surface. We used this volatility to increase positions in parts of the markets we find compelling on a full cycle valuation basis.

An under-the-radar story of 2021 was the bust in hyper-growth stocks, like the Ark Innovation ETF (ARKK), and highly speculative Special Purpose Acquisition Vehicles ETF (SPAK). Investor mania in these names reached a fever pitch back in February, and since then the returns have been dismal. They both closed the year down ~25% and have drawn down significantly more off their highs posted in February. Retaining investment discipline paid off yet again, as investors who avoided the temptation to chase the hottest part of the market sidestepped these steep losses.


You would be forgiven to be sitting here scratching your head, with stocks performing so well despite the real economic and human consequences the pandemic has wrought over the last year. It would be easy to think things have come too far too fast, and a reckoning must be around the corner. While this remains a possibility, especially when you look at the nosebleed valuation levels of U.S. stocks, the U.S. economy appears to be stable and on track for growth in 2022.

The bull market, which commenced at the March 2020 low is now approximately 640 days old. As our friends at Bespoke point out, “relative to post-WWII bull markets, the current one is still just a baby.” It is half of the median length of the 14 bull markets since 1945. Translation: bull markets and economic growth cycles tend to last a lot longer than 20 months.

They go on, “It’s highly unlikely for the economy to move back into a recession so early in an expansion, and two indicators we track closely - the ratio of leading to coincident indicators and housing starts – indicate that the recovery remains on track. Leading indicators tend to always roll over well in advance of a recession (even ahead of the COVID crash which was entirely coincidental). Closing out 2021, the ratio is right at cycle highs indicating the health of the expansion remains sound.”

And finally, no recession since the mid-1970’s has occurred without a yield curve inversion. While this could be on the horizon given the Federal Reserve is poised to start raising interest rates, it has not happened yet. The slope of the yield curve is a key piece of data we will be watching closing this year.


The Barclays Aggregate bond index finished the year down 1.5%, with long-duration treasuries down 4.6%. This was its first down year since 2013, and only the fourth negative annual return since the index’s inception in 1976. Returns after these rare periods have been quite strong historically.

The Federal Reserve is tapering its asset purchases and is signaling three rate hikes this year, with another three next year. As that process unfolds, we think the fixed income world will offer significant opportunities to investors willing to be tactical over the next several years.


One of the big stories of 2021 was the roaring comeback of commodity prices. After trading at negative $40/barrel in summer 2020, crude oil rallied all the way back to settle the year around $70/barrel. Coffee was up 76%, lumber up 59%, cotton up 44%, and copper was up 27%, to name a handful.

Supply-chain issues amplified underlying cyclical trends. Years of underinvestment after a cyclical bear market, coupled with trade issues and restrictive government policies across the complex meant producers were ill equipped to meet demand when the economy roared back after the lockdowns. While we are unlikely to repeat the blistering pace of gains seen in 2021, the supply/demand situation in many commodities seems supportive for further price increases.


We will keenly be watching developments with the mid-term election in November. Historically speaking, returns tend to be muted through the election, setting the stage for a rally as the outcome becomes clear. Everyone seems to agree that the only question is how many seats do Republicans take, and will it be enough to swing the balance of power in the legislative branch?


Across our strategies, Invariant portfolios are near the high end of their risk parameters. We anticipate being somewhat active in 2022, as monetary policy changes and the midterm elections give rise to volatility across asset classes. We think the time for “fad” investing passed early last year, and investors will do well in parts of the market where earnings are poised to structurally improve.

Portfolios are overweight in various sectors and factors. Namely: consumer staples, minimum volatility European shares, mid capitalization value stocks, and “equal weight,” which in practice means owning fewer technology shares than our benchmarks in favor of more attractively valued stocks. We like parts of the market trading at historical valuation discounts relative to the broad market. These valuation gaps tend to have a cyclical component, and we think they could be in the early innings of reverting.


Just when we thought we would be done talking about Covid-19 as the Delta variant worked its way across the world, we got Omicron. While we have been correct in handicapping the virus’s impact on the economy and financial markets the back half of 2021, we underestimated the potential for a surge in cases like the one we’re seeing. Good thing our job is financial markets, not epidemiology.

As written in our blog post back on December 21st, Invariant’s default position is COVID-driven volatility in financial markets is likely to reverse. The less severe Omicron variant, in an environment of effective vaccines and treatment drugs, means a situation warranting anything resembling the March 2020 lockdown is off the table. Our hope and expectation is the pandemic will be in the rearview mirror sometime in 2022.

Hopefully what we have seen in South Africa is indeed a peak, and that is leading the rest of the world.

Thank you for your trust and confidence.

David M. Borowsky

Chief Investment Officer


bottom of page