Congress meanwhile passed the infrastructure bill in November which should benefit industrial and materials stocks in the coming years. The biggest economic news in Q4 was that inflation reached a four decade high as supply chain and labor shortages caused inflation as measured by the Consumer Price Index (CPI) to reach 6.8% over the previous twelve months thru November. As a result, the Fed is reducing its monthly asset purchases by $20B for Treasury securities and $10B for mortgage-backed securities. In addition, the Fed is expected to raise rates as many as three times in 2022. Market volatility as measured by the VIX® index rose during Q4 to the highest levels since February due to the acceleration in Fed tapering and coronavirus concerns with the index reaching 35 in early December before declining to end the year at 17.

With the market appreciation several positions were called away during the quarter including stocks in the Consumer Discretionary, Industrial and Health Care sectors. Similar to the past several quarters, we continued to write closer to 30 delta for the bulk of our positions generating solid premiums north of 1.3% simple return. We continue to see rotation underneath the market, we found exceptional premium generation within our cyclical holdings from industrials and financials to semi stocks. As the market surged higher in July and August, we saw several positions partially called away in the Health Care, Technology and Consumer Discretionary sectors. In an effort to move the portfolio to a more neutral exposure, we continue to look to increase overall portfolio yield and add to more defensive sectors such as Health Care and stocks with more reasonable valuations as well as companies that benefit from re-opening as Covid-19 hopefully subsides.

Currently at year-end, the portfolio was 52% written, while new writes and rolls are established at roughly 65% coverage of the underlying positions. Looking toward 2022 we see a tug of war between earnings growth and P/E contraction as inflation measures continue to present problems for the Federal Reserve. How quickly rate adjustments are forecasted to change will have outsized influence on investor moods, and therefore, market direction. The first half of 2022 will most likely exhibit greater volatility as this information is digested and settles out in the back half of the year when the direction is more discernable.

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