The Year in Review, Presented by The PensionmarkMeridien Team
THE YEAR IN BRIEF
The bulls overcame the bears on Wall Street in 2021 – the S&P 500 advanced nearly 27%, notching its third straight yearly gain. The economy rebounded, even as new coronavirus variants resulted in anxiety, uncertainty, and supply chain disruptions affecting small businesses, corporations, and consumers. High inflation returned for the first time in decades. By the end of the year, inflation and COVID-19 had become two of the country’s biggest daily concerns. This was reflected in wobbling consumer confidence, even as the jobless rate declined toward pre-pandemic levels.
Congress passed one massive economic stimulus package and spent much of the year debating another. Most U.S. households received checks from the federal government, and many businesses found and took advantage of new programs to help them keep their doors open. Home prices remained high, but home sales lost some of their momentum.
With 2022 approaching, the Federal Reserve adjusted its monetary policy stance and interest rate forecast. The Fed’s bond buying program is now scheduled to wrap up in March 2022, and central bank officials project short-term interest rates to rise from historic lows next year. One key question for 2022 is if the Fed can pull off a soft landing. Can it tighten and rein in inflation without hampering growth?
THE U.S. ECONOMY
Gross domestic product (GDP) came in at 6.3% for the first quarter and 6.7% for the second quarter before cooling to 2.3% for Q3, per the Bureau of Economic Analysis. In December, the Conference Board projected annualized GDP at 6.5% for the fourth quarter. 1,2
GDP numbers like these hint at robust consumer spending, and that was certainly evident. The BEA said personal spending advanced 11.4% for Q1, 12.0% for Q2, and then 2.0% for Q3. Those big first-half jumps corresponded with business sectors reopening and vaccination rates climbing. Retail sales surged above 2020 levels – for Q2 2021, they were up 9.1% year-over-year according to the Census Bureau, and by November, the yearly gain was 18.2%. 3
Joblessness kept decreasing. The Department of Labor announced 4.2% unemployment in November: the lowest jobless rate in 20 months, down more than 2% from the start of the year. By November, the labor force had thinned by more than 2.4 million workers since the beginning of the pandemic; in some business sectors, there were more job openings than job applicants. This did not help ease supply chain bottlenecks, which affected many industries last year. 4,5
Stimulus efforts aided the economy. The $1.9 trillion American Rescue Plan, which became law in March, brought financial aid to businesses and schools, temporarily expanded the Child Tax Credit and federal unemployment benefits, and sent cash payments of up to $1,400 to approximately 90% of households. A sequel of sorts, the Build Back Better Plan, stalled in Congress as the year ended. 6
Yearly consumer inflation, under 2% back in 2019, neared 7% in the fourth quarter. The Bureau of Labor Statistics also measured a 9.6% annualized gain for wholesale inflation through November. In their last policy statement of the year, Federal Reserve officials stopped referring to inflation as “transitory” (as they had earlier in 2021), projected up to three 2022 increases to the federal funds rate, and announced that the Fed’s current bond-buying program would end in March, instead of June as stated earlier. 5,7
Elsewhere in the economy, the Conference Board’s Consumer Confidence Index rollercoastered from 87.9 in January to 128.9 in June to 109.5 for November. Existing home sales, according to the National Association of Realtors, were down 2.0% year-over-year in November; home prices, however, were up 13.9% in 12 months. 5,8
THE GLOBAL ECONOMY
As the American and Chinese economies recovered, they helped to lift the GDP of other nations. The International Monetary Fund thinks global growth strengthened to 5.9% in 2021, offsetting the 3.1% contraction of 2020. The economies of China, Europe, and Japan respectively grew 8.0%, 5.1% and 2.4% in 2021 by IMF estimates. For 2022, the IMF projects 5.6% GDP for China, 4.2% GDP for Europe, and 3.2% GDP for Japan. 9
In the fall, investors worldwide feared that a real estate bubble would soon pop in China. Evergrande, the country’s second-largest apartment developer, went $300 billion into default and required a government bailout. Two other big real estate firms teetered on the edge of default. About 25% of China’s GDP rides on its real estate sector. 10
While the lingering after-effects of the Brexit impacted supply chains in Europe, the United Kingdom posted better economic growth in 2021 than the other six G-7 nations, by the estimate of the Organization for Economic Cooperation and Development. The OECD projected 6.9% growth for the U.K. economy in 2021. 11
The MSCI EAFE index, which tracks developed-economy stock market performance in Asia and Europe, gained 8.78% for the year. Many of the world’s consequential stock indexes made double-digit gains in 2021. France’s CAC 40 28.85%, Taiwan’s TWII 23.66%, Mexico’s Bolsa 20.89%, and the EuroStoxx 50 20.56%. Japan’s Nikkei 225 added 4.91%, China’s Shanghai Composite 4.80%. In contrast, Brazil’s Bovespa sank 11.93% in 2021, Hong Kong’s Hang Seng 14.08%. 12,13
QUOTE OF THE YEAR
“Life can only be understood backward, but it must be lived forwards.”
LOOKING BACK, LOOKING FORWARD
The world may have been troubled by the pandemic, but optimism and bullishness prevailed on Wall Street last year. The S&P 500 closed at an all-time high 70 times in 2021 (the most record closes in a year since 1995), and stock market analytics firm FactSet estimated 45.1% year-over-year earnings growth for S&P 500 companies. 14
The Nasdaq Composite ended 2021 on a six-month win streak, and the Dow Jones Industrial Average advanced for a fifth straight month in December. The S&P finished the year at 4,766.18, the Nasdaq at 15,644.97, and the Dow at 36,338.30. 14
Small cap firms also did well on the whole. The Russell 2000, widely accepted as Wall Street’s leading small-company index, rose 13.70% across 2021 to 2,245.31. 15
As bond prices dropped, interest rates in the bond market rose. The return on the 10-year Treasury reached 1.78% in March; when the bond market closed on New Year’s Eve, the 10-year note was yielding 1.51%. For much of 2020, its yield was below 1%. 16,17
Real estate and energy surged more than any other market sectors in the S&P, both posting 2021 advances of more than 40%. The financial and tech sectors each added more than 30%. 14
|YIELD||12/31 RATE||1 YR AGO||5 YR AGO||10 YRS AGO|
Sources: Yahoo Finance, December 31, 2021, Treasury.gov (Bond Yield)
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid
Right now, investors are watching COVID-19 and inflation, and also watching for signals from the Federal Reserve. Can the central bank manage to alleviate price pressures deftly, and shift to a more aggressive monetary policy without unnerving financial markets?
The booming economy of 2021 could repeat in 2022. If it does, the Fed may be able to wrap up its stimulus and make up to three rate hikes this year without much protest from investors. If inflation fails to moderate, though, the Fed could orchestrate an urgent and hawkish response, to the dismay of global markets. Wall Street may pay extra attention to the yield curve (the spread between long-term and short-term interest rates on Treasury notes) and the jobless rate, to discern if there is any change in long-term inflation expectations or signs of labor market weakness. You may see turbulence on Wall Street if those signs begin to appear.
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The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The MICEX 10 Index (Russian: Индекс ММВБ10) is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE Eurofirst 300 measures the performance of Europe’s largest 300 companies by market capitalization and covers 70% of Europe’s market cap. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The NIFTY 50 index is National Stock Exchange of India’s benchmark broad based stock market index for the Indian equity market. It represents the weighted average of 50 Indian company stocks in 12 sectors and is one of the two main stock indices used in India. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The FTSE TWSE Taiwan 50 Index consists of the largest 50 companies by full market value, and is also the first narrow-based index published in Taiwan. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The Mexican Stock Exchange commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. The PHLX Semiconductor Sector Index is a Philadelphia Stock Exchange capitalization-weighted index composed of companies primarily involved in the design, distribution, manufacture, and sale of semiconductors. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. 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1. Trading Economics, January 1, 2022
2. Conference Board, December 15, 2021
3. The Balance, December 23, 2021 4. Federal Reserve Bank of St. Louis, December 3, 2021
5. Yahoo! Finance, December 21, 2021
6. CNN Business, March 11, 2021
7. Reuters, December 15, 2021
8. Reuters, December 22, 2021
9.. International Monetary Fund, January 1, 2022
10. Business Insider, December 23, 2021
11. Bloomberg, December 1, 2021
12. Wall Street Journal, January 1, 2022
13. Barchart.com, January 1, 2022
14. CNBC, December 30, 2021
15. CNN Business, January 1, 2022
16. CNBC, December 31, 2021
17. Yahoo! Finance, December 31, 2021
18. Treasury.gov, January 2, 2022