As we get into January, put away all the Christmas decorations and carefully pack strands of lights (that will somehow not work come December), it’s interesting to look back on the past year. Here’s some of what I noted that stood out to me from 2021.
- Markets don’t always do what you think they’re going to do. U.S. stocks gained 28% measured by the S&P 500 index after an 18% gain in 2020 and 31% gain in 2019. More surprising to me was that a third consecutive year of market gains happened without more than a 5% pullback in stock prices, all while the U.S. economy was struggling with several surges of Covid variants. (Source:http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html)
- Corporate America had a fantastic year in 2021. Corporations grew their earnings much faster than their stock prices went up - S&P 500 profits were up 45% year over year and the price to earnings ratio for stocks went down because profits grew so much. Stock prices are not historically cheap at a 21 price to earnings (P/E) ratio but they are cheaper than the 22.8 P/E ratio at the start of the year. (Source: www.wsj.com/articles/cheaper-stocks-boost-s-p-500s-prospects-in-new-year-11641059747)
- Inflation wasn’t transitory (and transitory is now a bad word in the financial media!) According to the Federal Reserve Bank, the Consumer Price Index went up 6.9% from November 2020 to November 2021. Despite all the talk that inflation would slow down as supply chains adjusted to the pandemic it hasn’t. Prices are up and the Federal Reserve is about to change its monetary policy and start to raise interest rates to keep inflation in check. (Source: https://fred.stlouisfed.org/series/CPIAUCSL)
- Gold did not help counter inflation, it lost 4% of its value. Gold is often touted as an inflation hedge but it wasn’t effective last year. With inflation running at 6.9% annually, gold lagged by almost 11% in inflation adjusted returns when you account for a decline in value and adjust for inflation. (https://www.cnbc.com/2021/12/31/gold-markets-us-treasury-yields.html)
- Energy prices were a big winner in 2021 – oil prices gained over 50%, increasing from $48/barrel to $75/barrel. This was quite a change from 2020 when oil prices went negative at one point and is a positive symptom of a strong economy where energy demand is recovering. I don’t like paying more for gas but it is nice to have places to go and things to do.(source: https://fred.stlouisfed.org/series/DCOILWTICO)
- The balanced portfolio (60% stocks, 40% bonds) isn’t dead. Much has been written in recent years about how low interest rates on bonds would “kill” the balanced portfolio. Bonds didn’t help the return of the balanced portfolio in 2021, but the outsized return from stocks offset a small negative return from bonds. According to Morningstar, a generic 60% stock/40% bond portfolio was up 15% in 2021. While bonds don’t always contribute to return, they do lower the overall risk of a portfolio in case stocks decline. (Source: https://www.morningstar.com/articles/1073089/how-did-the-6040-portfolio-do-in-2021)
- Interest rates did go up, but not as much as you’d think for the high inflation readings. As of December 31, the 10 year US treasury bond was yielding 1.52%. Some of this might be due to expectations that the Federal Reserve is going to keep inflation under control in the long run by raising rates. Either way, interest rates aren’t keeping up with 6.9% inflation. (Source: https://fred.stlouisfed.org/series/DGS10)
- Stocks were the inflation beater in 2021. A 28% return from stocks or a lower but still double digit return from a balanced portfolio (see #6 above) was a good way to keep up with inflation. Companies can raise prices and grow their earnings and profits, even in challenging business environments.
Writing about what happened in the past is always easier than making forecasts about the future. It would be great to know what the future holds for markets in 2022 – I wish I could spell it out here before it happens. The next best thing is making a plan and sticking to it no matter what gets thrown at us.
Wishing you and your family a happy, healthy and fulfilling New Year!