Courtesy CFM Tax and Investment Advisors
By Bill Canty, CPA, CFP
Even as the pandemic continued, 2021 was another strong year for the markets, though returns varied a bit across various market segments. The S&P 500 index gained 28.7 percent in 2021 as large cap stocks had another strong year. The index set numerous new highs during the year. This marks the third consecutive strong year for the S&P and for stocks.
The tech-heavy NASDAQ gained 21.4 percent in 2021 and the Dow Jones Industrial Average added 18.7 percent for the year. This represented only the sixth time that the S&P 500 beat both the Dow and the NASDAQ in the same year, and the first time this has happened since 2005.
The Russell 2000, made up of small cap stocks, was up 13.7 percent for the year. Most broad non-U.S. stock indexes also under performed that U.S. market.
Gains were not uniform and 2021 saw the rise of “meme” stocks where large groups of investors would buy shares of stocks like Game Stop and AMC Entertainment in an attempt to bid up the price and inflict losses on hedge funds who had short positions in the shares.
Gains across the S&P 500 were concentrated to an extent, with five stocks comprising just under 33 percent of the index’s returns according to Goldman Sachs. The five stocks were Apple, Microsoft, Nvidia, Tesla and Alphabet (parent of Google).
Dissecting the gains in the S&P 500 showed that the technology sector of the S&P 500 played a true leadership role in the gains of the index in 2022 as it has over the past several years.
The picture across foreign stock markets was very mixed. The Stoxx Europe 600 index was up 22 percent for the year. On the other hand Chinese stocks fared poorly amid a crackdown by the government on many tech stocks and amid signs that growth in the second largest economy in the world may be slowing a bit.
Things were not as great for bond investors. Yields on many types of bonds are at or near record lows. This is a tough environment for fixed income investors seeking a decent yield. The Bloomberg U.S. Aggregate bond index finished 2021 with a minus-1.54 percent total return. With the exception of some high yield bond indexes, most U.S. bond indexes ended the year on the negative side.
Holders of cash fared just as poorly with most money market funds yielding around 0.01 percent by year-end.
Commodities and crypto posted solid returns for 2021, though there was quite a bit of volatility in Bitcoin and other cryptocurrencies at times.
While of course nobody knows what 2022 will bring, here are some factors to consider as we enter the new year.
In spite of the pandemic, supply chain issues, labor shortage and other hiccups, the economy performed well in 2021 with global GDP growing about 5 percent in 2021. This is on the heels of a drop of over 3 percent in 2020. Forecasts call for continued growth in 2022 of about 4 percent.
Corporate profits were also strong in 2021 with corporate profits reaching record levels in the third quarter of 2021.
A strong economy and strong corporate earnings are positive signs for investments as we head into 2022. Inflation is an issue as we move into 2022 due in part to the supply chain issues and labor shortages faced by many businesses. The Fed recognizes this and has indicated they will accelerate their tapering of bond purchases into 2022.
The Fed has kept interest rates low, but the consensus of the Fed governors indicates that we could see several rate hikes in 2022 and beyond. Low interest rates have been a contributing factor to an exceptionally strong housing market in many parts of the country.
Our view is that as long as interest rates don’t rise too fast, these rate hikes should not be damaging to investors or to the economy. If this does help moderate the growth of inflation then the moderate increase in interest rates will have been well worth it. We view rampant inflation as a major concern regarding the ability of the economy and ultimately the stock market to continue on a path of growth in 2022 and beyond.
As in past years, we remain committed to focusing on the long-term financial goals or our clients in helping them formulate and implement an investing strategy. Economic and market conditions change over time, but the benefits of asset allocation and patience are timeless qualities for investors.
As far as stocks go, we favor a barbell approach with roughly equal weightings of growth and value holdings. As we look ahead to the potential of continued and perhaps increased levels of inflation, many companies whose businesses are cyclical, such as within the financial sector, could be poised to thrive. Many of these companies fall under the value umbrella.
As for bonds and fixed income, our focus is on short duration assets and inflation protected securities. Assuming the Fed rate increases are gradual, investors should benefit from higher yields on bonds.
Assuming moderate inflation and gradual tapering by the Fed, we remain optimistic as far as the markets go for 2022. Although, we may not see the level of growth that we saw in 2021 and over the past three years. Dealing with the pandemic will continue to shape our lives and may certainly impact the markets in general, and have an impact on specific companies and sectors.