Financial Market Update
Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.
The last week of 2021 saw stocks close generally higher, with only the Nasdaq slipping lower. The Dow ended the week up 1.1%, followed by the S&P 500, the Global Dow, and the Russell 2000. The week between Christmas and New Year’s Day is generally marked by thin trading, and last week was no exception. Most of the market sectors closed the week in the black, led by real estate, utilities, materials, and consumer staples. Ten-year Treasury yields inched higher, crude oil prices rose $1.66 per barrel, while the dollar dipped lower.
S&P 500: 4,766 (up 0.85% for the week and up 26.89% for the year)
NASDAQ: 15,644 (down 0.05% for the week and up 21.39% for the year)
Dow: 36,338 (up 1.08% for the week and up 18.73% for the year)
US Treasury 10yr: 1.51% (from 1.49% last week)
Crude Oil: $75.44 (from $73.78 last week)
Gold: $1,830.30 (from $1,810.00 last week)
USD/Euro: $1.1373 (from $1.1315 last week)
2022 Market Outlook
Looking for the return to normalcy in 2022? Expectations could be the key.
2021: the Economy, Americans, and the Markets
During 2021 the economy continued its steep, rapid recovery from the deep, pandemic recession to an economy with close to 5% GDP growth and near full employment. Corporate profits soared, innovation and entrepreneurship accelerated, and business investment increased productivity. The underlying economy exited 2021 in a robust position.
At the same time, many Americans entered 2021 feeling the US was headed in the wrong direction. Even though workers had gained new power to change jobs and seek higher wages, the Great Resignation was often attributed to burnout or workplace dissatisfaction. As small businesses attempted to hire and rebuild, the leisure and entertainment industry was repeatedly thwarted by Covid variants keeping participants away. And consumers were confronted by record high prices as they sought to assuage frustrations with unavailable goods caught in supply chains woes.
If there was one good thing Americans enjoyed about 2021, it was the markets.
The US stock markets surprised nearly everyone by trudging higher for most of the year. The bears couldn’t muster a downturn greater that 6% in all of 2021, making the year one of the calmest on record. The S&P 500 return for 2021 was 26.89%, with five year average annual returns coming in close to 17.5%.
Will the markets continue to see what Americans couldn’t this year? Or have the markets gotten ahead of themselves?
The economy and market performance are often built on expectations. Here are three examples that can be applied to 2022.
Expectations and Inflation
Economics 101 teaches that there are two types of inflation: Demand Pull (too much demand and too little supply; resulting in price hikes) and Cost Push (wages and raw material cost increases, forcing business owners to charge more). Both factors are occurring today. But expectations also play a huge role in the future of inflation. If consumers and business owners expect inflation to rise, that belief can become a self-fulfilling promise. For example, if consumers expect higher inflation in coming months and believe that goods will cost more in the future, they will likely buy cars, stoves and other things now, thereby exacerbating the current demand problem.
The Federal Reserve controls the levers to respond to runaway inflation. Markets are extremely concerned that hot inflation will force the Federal Reserve to tighten monetary policy faster than expected.
Expectations and the Bond Market
Bond market performance is driven by interest rates. As interest rates rise, the value of underlying bonds fall, clipping returns. If interest rates rise slowly, bond markets can usually absorb most of the increases, especially from low interest rate levels like those that exist today. Jerome Powell, the Federal Reserve Chair, is working hard to reassure bond investors that the Fed will act in a measured fashion to tamp down rising inflation. However, if bond traders start expecting the Fed to tighten more quickly (whether the Fed intends to or not), they can send interest rates spiking, wreaking havoc on the markets.
Expectations and Stock Market Returns
Remember the 1990s? Many people thought the good times could last forever. Historically, stock market average returns tell a different story. When market prices become elevated (another form of inflation), they tend to revert to lower returns over time. Equally, when stock prices are super low, they tend to rise, moving towards average historical returns. Timing is not perfect. High prices can stay high for a long time, as low prices can stay low. But eventually, neither the good times nor the bad times last forever.
Valuations are rarely the predictor of immediate market performance. But it is a fair bet that average returns over the next ten years will come down dramatically from current lofty double digit performance. Whether that process starts in 2022, 2023, or some other year, is not yet predictable. However, investors need to adjust their expectations for lower equity returns, to better prepare for their own financial futures.
StrategicPoint Expectations for 2022
Here are some expectations our Portfolio Management Committee has for the coming year. As a reminder – expectations are not predictions or promises. They are assumptions that we use to base our portfolio decisions. We have learned repeatedly, over the years, to expect the unexpected, and will thus monitor these current beliefs throughout the year for recommended changes.
- Economic growth should moderate but remain higher than during the post 2008 economic crisis, despite a likely Omicron driven slowdown in Q1.
- Market returns will likely remain positive, albeit at a more subdued rate of return than recent years. However, the path of rising stock prices could be rockier, as markets assess how well the Federal Reserve navigates the withdrawal of monetary stimulus.
- The Federal Reserve should finish tapering its bond purchases by spring and start raising interest rates by mid-year, carefully monitoring, and attempting to control inflation expectations.
- Bonds should, once again, deliver more ballast to the portfolios than positive returns.
- Supply chain problems are expected to improve gradually throughout the course of the year because of increased capital spending, vaccinations and consumers shifting back to services from buying goods.
- Consumer spending should be able to support continued economic expansion, due to strong personal balance sheets and accumulated savings.
- Labor shortages will likely continue, thereby keeping wage pressure on prices.
- Inflation should gradually retreat, settling at around 3% – 3.5% once supply chain issues are better controlled. This level of inflation will not be high enough to meaningfully stifle growth.
- Corporate earnings should remain strong, but be gradually reined in by rising interest rates. Ditto with the housing market.
- Investors could remain anxious as Covid lingers, disruptions continue, and the Fed gears up for monetary tightening.
In sum: 2022 starts with a strong economic base topped with a layer of unpredictability and volatility. Overall, with positive economic growth and little talk of a recession, the markets are expected to deliver a year of modest, constructive returns.
We hope all of you find financial stability and happiness in 2022.
Betsey A. Purinton, CFP®
Chief Investment Officer
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*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The 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 NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Third party content does not reflect the view of the firm or of our parent company, Focus Financial Partners. LLC and is not reviewed for completeness or accuracy. It is provided for ease of reference.
Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021. Part of this content contributed by Forefield, Inc.