GW&K Investment Review 4Q 2021


Are we going down a rabbit hole? Is the sky falling? Everywhere we look, the news seems daunting: new twists on the pandemic (Omicron), hyperinflation, Congressional stalemate, China’s changing policies, Russia eyeing the Ukraine, rising interest rates, and Middle America, the so-called silent majority, frozen out by the extreme wings of both political parties.

It all sounds like the perfect setting for the next leg of a bull (yes, bull!) market. The fact is, equity investors prefer less-sweeping governmental policies and, given the state Washington is in, it’s hard to expect that much more will be forthcoming. Moving into a mid-term election year, both parties need to move swing voters, which most likely means fewer compromises and a faltering Presidential agenda.

Omicron, like a wildfire, will burn itself out. Fast moving, less lethal, it may speed herd immunity. The various drug companies will have all sorts of treatments in 2022 and by mid-year the fear factor should be vastly lessened.

China does not want to experience what happened in Russia, i.e., a very few oligarchs in control of vast parts of their economy. Whether reigning in billionaires, making education affordable, limiting video game time for kids, or reducing excess speculation, it all seems reasonable to them. In a dictatorship, events are black or white, happen very quickly and are off-putting, especially to those in the developed world. China has no interest in being a democracy and does not play by the rules of the West. Its leadership wants to win an economic cold war, using the outside capital and ingenuity created by the West. The old saying holds true—the toothpaste is out of the tube. Their population wants the same economic benefits enjoyed in the West. They seem more than willing to trade what we call their “political voice” for security, education, healthcare, and economic opportunity; that is the partnership Xi Jinping has contracted with the Chinese people. We in the West are unsettled by his abrupt policy changes, but he doesn’t care what we think. China has had interference by foreign powers for more than 150 years. They will be their own system, owing nothing to anyone. It may be difficult to watch, but China will be the largest economy in the world in five years, so, like it or not, here they come.

Russia’s barking at the West is more of the same. Of course they feel overwhelmed, since NATO, designed to offset the Soviet Union and all its puppet governments, has been pushed to their doorstep in an increasingly aggressive manner. We should stop this approach before unintended consequences emerge. The Biden administration’s withdrawal from Afghanistan has called into question our resolve to stand by our allies, and hopefully Russia doesn’t seize this moment as an opening to change the landscape of Europe.

Next, the issue of the day—inflation. For as many years as I have written this piece I have said that inflation is not and will not be a problem. One might say that I have been right until this moment, but this time I’ll be wrong. I still believe I am right; inflation is not and will not be a problem. If you are going to take the instance of a global pandemic leading to dislocations and extrapolate that into the future, you are going to be wrong. Of course prices have risen, either because businesses see the opportunity to take advantage of the times, or because there is a real reason, like the rising costs of labor and supplies. Either way, it makes little difference—in two years, when the supply chain normalizes and businesses get back to the new normal, there will be little room for price increases. The rising cost of labor is a healthy outcome. I don’t see that as inflationary. Wages turn into consumption through sales, which sustain revenues. Even if companies lose a little in profit margins, it should not distress stock investors. The market wants a robust economy and the greater the degree of full-time workers and better wages, the better the economy will do.

Finally, fears about rising interest rates. While shorter rates will rise as central banks tighten monetary policy, long-term rates, which care only about inflation expectations, should remain more stable. Could the 10-year Treasury yield move from 1.48% to 2% or even 2.5%? Sure, so what? Rates will not move to 3% or 4%. If the government’s cost of capital rises, then funding the deficit would crowd out discretionary spending. We are locked in a lower interest rate environment for a long time. For years, I have likened our situation to Japan’s, using a 10-year lag, and the comparison still holds (Chart 1). We are a mature economic system, with little immigration and a low birth rate. We depend on world trade and research to expand margins and create businesses.

We will always be the leader in innovation and capital formation, but we need the world to buy our products, and the world needs us to buy theirs. This will be the key to peace—unequivocal mutual dependency. If the pandemic has taught us anything, it is that we all live on the same planet; we like to think that countries can operate independently to each other, controlling their own fate, but in a worldwide economy that’s impossible. There are universal needs that nations mutually share, and the global economy will always reflect that.

So don’t worry. Get vaccinated. Live life and take advantage of those who see the world through dark glasses.

Harold G. Kotler, CFA
CEO, Chief Investment Officer


Indexes  are  not  subject  to  fees and  expenses  typically  associated  with  managed  accounts  or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness  or timeliness. Third-party data  providers make  no  warranties  or  representations  relating  to  the  accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg (,  FactSet  (,  ICE  (, FTSE Russell (, MSCI ( and Standard & Poor’s ( Performance results reflect the reinvestment of dividends and income and are expressed in U.S. dollars.  MSCI Index returns are presented net of withholding taxes.  This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Opinions expressed are subject to change. Past performance is not indicative of future results.


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