How will you remember 2021? Was it a good year for investors? It might surprise you to learn that last year the S&P 500 had the second most new all-time highs in history, with 70. In other words, of the 252 trading days in 2021, 70 of those set a new record close.
Volatility was tame in 2021. There was only one instance of a 5% drawdown over the entire year and zero corrections (defined as a 10% drop from market highs.) Indeed, we shouldn’t take years like that for granted, as they don’t come along very often.
As of December 31st, 2021, all the major markets posted very positive returns for the year. The Dow Jones Industrial Average (Dow) grew by 20.9%, the S&P 500 was up 28.7% and the NASDAQ rose 22.2%.
It’s important to take a pause here to address market returns. Our newsletter focuses on the returns of three major markets: the Dow, S&P 500 and NASDAQ. Collectively those markets are useful proxies for stock performance and overall economic trends. They are not included as an example of what you “could have made” if you had been invested in the index. For one thing, you cannot directly purchase an index. For another, our investments are managed as diversified portfolios, which include many different asset classes not reported in the newsletter. In other words, it is not useful to compare your individual investment performance to a specific stock index. As always, we are happy to discuss your individual portfolio performance and financial goals.
Returning to the stock markets, January has had a rocky start. On January 5th the Federal Reserve (Fed) released minutes from their most recent meeting, indicating they are considering faster and earlier interest rate hikes than previously expected. The same day the Bank of England issued a surprise rate increase.
Markets reacted to this “mixed bag of uncertainty regarding inflation versus monetary support from central banks,” [Louis Navellier, founder of Navellier and Associates] with a significant selloff – the Dow dropped 393 points, the S&P shed 93 points and the NASDAQ fell by 523 points. Fears of central bank intervention were somewhat assuaged the following week when Fed Chari, Jerome Powell, testified before congress.
In other news, employment continues to send mixed messages. At the end of November there were 10.6 million job openings – a decrease from 11 million the previous month. However, workers also quit their jobs at a record rate in November. In December 199,000 new jobs were created, which was below expectations (economists forecast 422,000) but the U.S. jobless rate slipped to 3.9%, a new pandemic low. For context, the jobless rate stood at 3.5% just prior to the start of the pandemic.
In order to attract workers, businesses have offered signing bonuses, higher pay and better benefits. As a result, hourly pay jumped 0.6% in the month of December alone and wages rose 4.7% in 2021. That marks the most rapid pace of wage growth in several decades.
Inflation continues to dominate the news cycle and rates have been high. However, we may be seeing early signs of an ease in inflation as evidenced by growing inventories. Supply chain issues are also beginning to be resolved. Personal savings are lower suggesting consumers have spent the excess savings they accumulated during the pandemic and this should in turn cool consumer demand, which could ease inflation.
Considering these factors, our current bout of volatility, while unsettling, does not appear to be foreshadowing an imminent recession. Instead this will likely be a short-term event prior to a longer-term advance.
As of January 14th, the markets all posted a negative return. The Dow Jones Industrial Average (Dow) fell 673 points (1.84%), the S&P 500 dropped by 134 points (2.79%) and the NASDAQ lost 939 points (5.93%).