2021 Year in Review

Like 2020, 2021 was largely defined by the Covid-19 pandemic. Yet despite new variants like Delta and Omicron fueling case outbreaks throughout the year, rapid development and widespread distribution of the Covid-19 vaccine boosted investor sentiment. In fact, major U.S. stock indexes like the S&P 500 posted double-digit returns in 2021. Meanwhile, supportive fiscal and monetary policies fueled U.S. economic growth throughout the year.

On the other hand, high energy prices and ongoing supply chain issues ushered in inflation levels not seen in 40 years. Though the Fed initially brushed off inflation as “transitory,” they’ve since adjusted their stance. Consequently, the Fed is likely to taper its quantitative easing programs and raise interest rates sooner than expected to combat rising prices.

Indeed, last year was in many ways a continuation of a tumultuous 2020. But it wasn’t all bad. As we enter the third year of the pandemic, 2021 may provide insight into what investors can expect in 2022.

A Year in Review: U.S. Stocks

On the whole, U.S. stocks had a great year in 2021. The S&P 500 Index, a popular proxy for the U.S. stock market, hit record highs 70 times in 2021—its highest annual tally since 1995, according to CNBC, and finished the year up nearly 27%. The Dow Jones Industrial Average and Nasdaq gained 18.7% and 21.4%, respectively.

While accommodative fiscal and monetary policies supported financial markets, strong corporate earnings also boosted U.S. stocks. According to data from FactSet, the estimated year-over-year earnings growth rate for 2021 is 45.1%–its highest annual growth rate since FactSet began tracking earnings in 2008.

Five stocks—Apple, Google, Microsoft, Nvidia, and Tesla—accounted for more than one third of the S&P 500’s record performance in 2021. The Energy and Real Estate sectors were also top performers in 2021, each rising more than 40% for the year. In addition, the Technology and Financials sectors gained more than 30%.

International Stock Performance in 2021

In international markets, developed equities posted double-digit returns. As an example, the MSCI World ex USA Index rose 12.6% in 2021. Like the U.S., signs of the pandemic waning and central bank stimulus drove stock market gains.

European banks had their strongest year in more than a decade. Unfortunately, emerging market equities didn’t fare so well, as the MSCI Emerging Markets Index lost 2.5% in 2021. Poor performance in emerging markets was primarily led by China’s efforts to limit the influence of big technology companies, as well as the country’s property sector crisis.

Fixed Income Markets

In 2021, inflation reached its highest rate in 40 years. This, combined with tightening efforts by central banks, made it a challenging year for bonds. As such, the Bloomberg Global Aggregate Bond Index returned -1.39% in 2021. U.S. Treasuries, which dominate the Index, fell more than 2% during the year, while corporate bonds fared slightly better.

On the bright side, U.S. Treasury Inflation Protected Securities (TIPS) gained nearly 6% in 2021. In addition, the riskiest corporate high yield bonds (sometimes referred to as “junk” bonds) posted strong gains last year.

The U.S. Economy’s Year in Review

In 2021 we learned that the Covid-19 recession ended in April 2020, according to the National Bureau of Economic Research, making it the shortest recession in U.S. history. The economic decline was also one of the deepest, as GDP plunged 31.4% in the second quarter of 2020. Yet unprecedented stimulus measures resulted in a massive snapback, ending the recession after only two months.

Stimulus continued into 2021, with Congress passing a $1.9 trillion Coronavirus Recovery Plan in the first part of the year. This included a third round of stimulus checks, increased federal unemployment benefits, and aid to state and local governments, among other measures.

Meanwhile, Fed Chairman Jerome Powell reiterated the Fed’s commitment to maintaining accommodative monetary policy. Shortly after, the 10-Year Treasury yield began its rapid climb on expectations that stimulus programs combined with the vaccine rollout would lead to higher levels of economic growth and inflation.

In April 2021, U.S. GDP topped its pre-pandemic level as the U.S. economy grew 6.4% in the first quarter. Consumer spending, which accounts for about 70% of GDP, also exceeded its pre-pandemic level, according to data from Goldman Sachs. In May, minutes from the April FOMC meeting revealed that the Fed was starting to think about tapering their quantitative easing program given the rapid economic progress since the start of the pandemic.

Of course, inflation dominated headlines in the second half of the year. While the Fed initially believed rising inflation was transitory due to pandemic-related supply chain issues, they changed their stance later in the year. At their November meeting, the Fed announced they would begin tapering their quantitative easing program by $15 billion per month. The FOMC also acknowledged that they’d be willing to accelerate this pace and/or raise interest rates sooner to combat rising inflation if necessary.

Unexpected Trends We Saw in 2021

While U.S. stocks soared in 2021, many investors poured their money into more speculative areas of the market. In January, shares of U.S. video retailer GameStop surged as members of Reddit’s Wall Street Bets group collaborated to squeeze out the short position held by hedge fund Melvin Capital. Social media memes fueled GameStop’s momentum, leading to a 1700% increase in share price in one month. However, trading app Robinhood curbed share buying, blaming demands from its clearing houses.

Other so-called “meme stocks” like AMC, Bed, Bath & Beyond, and Avis followed similar trajectories as rogue traders flooded the market. Unfortunately, many of these traders failed to realize their gains in these stocks before share prices tumbled back to Earth.

SPACs, or Special Purpose Acquisition Companies, also flooded the market in 2021. SPACs bypass the traditional lengthy path to an initial public offering (IPO) by acquiring or merging with an existing firm. Of the more than 1,000 companies which began trading on U.S. exchanges in 2021—a record year for IPOs—53% were SPACs, according to FactSet.

Lastly, crypto markets had a rollercoaster ride in 2021. The price of bitcoin soared early in the year, fueled in part by demand from institutional investors. Within the first five trading days of January, its price went from $30,000 to $40,000, according to CoinDesk. A series of Twitter posts by Tesla CEO Elon Musk helped push bitcoin’s price to nearly $57,000 in February. However, after reaching a record-high of $65,000 in April, news of China’s ban on bitcoin resulted in bitcoin losing roughly half its value. As the price of bitcoin stabilized over the summer, bored investors turned their attention to NFTs, the latest evolution in digital assets.

What Can Investors Expect in 2022?

The emergence of the Omicron variant in late 2021 has led to a fresh round of economic challenges as we begin 2022. Indeed, many businesses are struggling as Covid sidelines their employees. In addition, inflation continues to be a wildcard.

These factors, combined with the ongoing uncertainty of the pandemic, make it difficult to predict how markets will behave in 2022. The truth is we can never predict what markets will do, whether it’s tomorrow, next month, or next year.

We do know that long-term investors are typically rewarded for staying the course, especially during periods of uncertainty and discomfort. If you have questions about your investment plan, please do not hesitate to get in touch. And if you don’t have an investment plan but would like the peace of mind of having a trusted financial advisor manage your assets, we’d be happy to hear from you.