Back to All Posts

8 minutes

Key Points for the Week

  • The S&P 500 returned 28.7% in 2021 as large U.S. companies continued to outperform many other asset classes.
  • Valuations on the S&P 500 remain above average even though earnings grew faster than stock prices thereby reducing the perceived overvaluation from last year.
  • Industrial production data from Japan and South Korea show those two countries are helping to ease the shortage of semiconductors and automobiles.
  • Our next Town Hall is scheduled for Wednesday, January 19th at 6:30 p.m. To register, please use the link here.

Last year, everything seemed to shoot higher, from COVID-19 cases and vaccinations to economic growth and global stock markets. Everything except for optimism. As the year came to an end, a CBS News poll found that 40 percent of Americans felt 2021 was mostly filled with sadness, although almost three out of four people polled said they were hopeful for 2022.

As we head into the new year, let’s take a look back at 2021.

  • Vaccinations took off. At the start of the year, very few people were vaccinated against COVID-19. Despite issues with vaccine reluctance, by the end of the year more than 58 percent of the world’s population had received at least one dose of a COVID-19 vaccine.

    United Arab Emirates led the way with 99 percent of their nation’s population vaccinated. Nigeria lagged with about 95 percent of the population unvaccinated. More than 61 percent of Americans were fully vaccinated, and another 12 percent were partially vaccinated, according to Our World in Data.

  • United States’ economic growth was stronger than it has been in decades. In December, The Conference Board estimated the U.S. economy grew by 6.5 percent annualized in the fourth quarter of 2021, and 5.6 percent over the full year. That’s the strongest growth in decades, according to Ben Levisohn of Barron’s. The publication reported the lesson of the last century is, “Don’t underestimate the resilience of the U.S. economy.”
  • Inflation rose faster than it has in decades. Consumer prices increased at the fastest pace since 1982. By December, prices were up almost 7 percent for the year in the U.S., according to The Economist. As rents and wages increased, the Federal Reserve changed the language it used when discussing inflation, removing the word “transitory.” Some economists say inflation will subside in 2022, while others believe it will be more enduring, according to a report from Goldman Sachs.
  • Consumer sentiment declined and then rose in December. Overall, consumers were less optimistic during 2021, largely because of inflation. About 25 percent of households said inflation was eroding their standard of living.

    In December, however, optimism moved sharply higher “…primarily due to significant gains among households with incomes in the bottom third of the distribution. Indeed, the bottom third expected their incomes to rise during the year ahead by 2.8%, up from 1.8% last December,” reported Richard Curtin, the University of Michigan’s Surveys of Consumers chief economist. That’s the biggest gain in 22 years.

  • The Federal Reserve took a hawkish turn. As inflation persisted, the Fed decided to accelerate monetary policy tightening by tapering bond purchases more quickly than expected. In December, 12 of the 18 Federal Open Market Committee members indicated they anticipate at least three rate hikes in 2022. The increases would lift the Fed funds rate from zero.
  • Major U.S. stock indices set record after record. After trading closed on December 31, 2021, “All three major U.S. stock indexes scored monthly, quarterly and annual gains, notching their biggest three-year advance since 1999,” reported Stephen Culp and Echo Wang of Reuters.
  • Corporate earnings proved resilient. Despite supply chain issues, labor shortages, wage increases and inflation, U.S. company earnings were exceptional. Earnings, which reflect company profits, were up 45.1 percent year-over-year. That’s well above the trailing 10-year average annual earnings growth rate of 5.0 percent, according to John Butters of FactSet.
  • China cracked down on “capitalist excesses.” “More than $1TRILLION was wiped off the collective market capitalization of some of the world’s largest internet groups...Entire business models – online tutoring, for example – were laid waste. Investors needed to hear that an end was in sight. But on August 8th the Communist Party issued a five-year blueprint aimed at reshaping China’s tech industry – confirming to even the most optimistic industry watchers that the abrasive changes would continue well into 2022,” explained The Economist.
  • Finding income in the bond market was challenging. “Emerging-market bonds were supposed to be dragged down this year as central banks moved toward withdrawing stimulus. Instead, the best-performing global debt was all from developing nations…South Africa, China, Indonesia, India and Croatia topped the rankings of 46 markets around the world in 2021,” reported Lilian Karunungan and Masaki Kondo of Bloomberg.

This Week in the Markets

2021 was a very happy year for U.S. stock investors. The S&P 500 finished the second year of a pandemic 28.7% higher than it started the year. Other countries did not do as well. The MSCI ACWI, which includes U.S. stocks, rose 18.5% in 2021, matching closely the 18.7% return of the Dow Jones Industrial Average. Those returns are still very impressive, but they lag behind the S&P 500. Bonds declined slightly. The Bloomberg U.S. Aggregate Bond Index slipped 1.5% last year.

Earnings are likely to have grown more than 45% in 2021, based on the first three quarters of results and estimates for the fourth quarter. The strong earnings growth allowed the price-to-earnings (P/E) ratio to drop in 2021 even though markets moved significantly higher. While valuations have declined, they remain above average and are being supported by low bond rates.

CTN 01-03-22 Image 1

Moving back to fundamentals, industrial powerhouses Japan and South Korea reported strong bounces back in industrial production after having slowed in October. Strength in auto and semiconductor manufacturing boosted Japan to 7.2% growth and South Korea to 5.1% growth.

Weekly results were in line with the yearly themes. The S&P 500, MSCI ACWI, Bloomberg U.S. Aggregate Bond Index all gained last week. The U.S. employment report will headline a series of key labor market reports this week.

Three Big Shifts in 2021

Why do people set New Year’s resolutions? Humans use auspicious dates, such as New Year’s or birthdays, to evaluate their lives and plan for next steps. Nothing stops us from setting our next big goals on August 10th, but those with birthdays on that day are much more likely to do so than the rest of us.

The downside of this approach is we start to lump time periods together based on the calendar and attribute more meaning to those periods than they deserve. A natural consequence is failing to notice major changes because the annual data obscure some underlying movement.

In this week’s update, we review three keys shifts from 2021 that will likely shape markets in the coming year.

Interest Rates

The biggest shift occurred in interest rate policy. The supply shortages and government stimulus proved too much for supply structures, and the Fed turned hawkish as inflation rose. The first step was to begin reducing purchases of government bonds and mortgages. Once those extra purchases have tapered to zero, the Fed signaled it will likely move rates away from the near 0% rate it established shortly after the pandemic began.

Chinese Policy

China shifted away from a free-market approach for its most innovative companies and moved toward reining them in with more regulation. Those companies had made their founders and others very wealthy. But rather than embrace that growth, President Xi Jinping sought to reshape it with an emphasis on a broader distribution of wealth. The resultant risk for Chinese companies is one reason emerging markets finished lower last year.

Sector Performance

Another example of the calendar giving the wrong impression comes from style box performance. “Small cap value” was the top performing style box in the Morningstar Style Box universe, rising 31.8% last year and beating out second place “large cap core,” which rose 29.3%. It would be logical to assume small cap value had some momentum going into 2022. But the truth is small cap value built up a big lead and then limped to the finish. In the first five months of the year, small cap value gained 31.5% and outperformed large core by more than 20%. For the last seven months small cap value barely moved while large core posted steady gains.

2021 will go down for most of us as the second year of the COVID-19 pandemic. As we enter the third year of wrestling with the virus, our focus will rightly be on managing life. Yet, some major shifts are occurring that may turn out to be very important this year, especially if COVID begins to fade.

Did you Know? This Week in History

January 6, 1838: Samuel Morse Demonstrates the Telegraph

On January 6, 1838, Samuel Morse’s telegraph system was demonstrated for the first time at the Speedwell Iron Works in Morristown, New Jersey. The telegraph, a device which used electric impulses to transmit encoded messages over a wire, would eventually revolutionize long-distance communication, reaching the height of its popularity in the 1920s and 1930s.

Morse spent several years developing a prototype and took on two partners, Leonard Gale and Alfred Vail, to help him. In 1838, he demonstrated his invention using Morse code, in which dots and dashes represented letters and numbers. In 1843, Morse finally convinced a skeptical Congress to fund the construction of the first telegraph line in the United States, from Washington, D.C., to Baltimore. In May 1844, Morse sent the first official telegram over the line, with the message: “What hath God wrought!”

For the next few years, private companies, using Morse’s patent, set up telegraph lines around the Northeast. In 1851, the New York and Mississippi Valley Printing Telegraph Company was founded; it would later change its name to Western Union. In 1861, Western Union finished the first transcontinental line across the United States. Five years later, the first successful permanent line across the Atlantic Ocean was constructed and by the end of the century telegraph systems were in place in Africa, Asia and Australia.

Over the course of the 20th century, telegraph messages were largely replaced by cheap long-distance phone service, faxes and email. Western Union delivered its final telegram in January 2006.

Weekly Focus

I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.

Jimmy Dean, American Singer

Life is like riding a bicycle. To keep your balance, you must keep moving.

Albert Einstein, German Theoretical Physicist