Party Like It’s…
Without a doubt the past two years have been challenging with many happy to bid adieu to 2021. As we look ahead to 2022 there is optimism, but we would be remiss to not reflect on this last year before moving ahead. Notwithstanding personal health issues or any negative impacts the pandemic may have had on loved ones, in most regards 2021 could be considered a decent year, especially when compared to a year ago.
From the stock market point-of-view, 2021 was a decent year with the S&P 500 returning more than 25% year-to-date. On a long-term historical, this benchmark returns on average somewhere between 8-10% annually making this year well above average. In comparison, 2020 had the index returning over 18%, despite the nearly 35% nosedive experienced by the market when COVID first threw the world into unexpected chaos.
The economy has stabilized and remains robust with unemployment levels falling dramatically throughout the past year and nearing some of the lowest levels in history. Personal incomes and average hourly earnings rose sharply and are at all-time highs. The economy is now expanding on its own regardless of the government stimulus payments and pent-up demands. Unfortunately, inflation is forecasted to be the highest this country has seen in decades. Higher prices equate to a higher cost of living and when viewed in real-terms, income and wages do not stretch as far as they used to. Generally higher prices occur due to economic growth, therefore not all inflation is negative. However, when personal income is not aligned with inflation it creates a difficult environment for consumers and workers, as experienced now.
This last week, the markets began with a sharply negative day attributed primarily to news that the Build Back Better (aka federal spending) bill does not have the support needed for passage. Goldman Sachs indicated that GDP growth in 2022 will be less than previous expectations due to the lack of passage of the over trillion-dollar spending bill. While the individuals at Goldman Sacks may be very knowledgeable and intelligent, we somewhat disagree with their assessment. Yes, some of the spending would go towards certain social programs that benefit the economy in the short-term, but the amount of spending proposed would add increased liquidity into the economy, further fueling inflation. Further, not all the spending would contribute towards growth and the expenditures require further funding through the combination of tax hikes and debt, which would be a drag on future growth especially when looking out longer-term.
Also affecting the markets was further insight regarding shifts in monetary policy from the Federal Reserve, the increase in omicron COVID cases with the discussion of potential shutdowns, including soft lockdowns. Soft lockdowns are those driven by business reductions and closings due to the virus spread. Tuesday’s quickrebound energized the market with continued gains throughout the rest of the week where we now again sit at all-time highs. It
seems the Santa Claus rally we all hoped for came to fruition, especially if it continues this coming week to finish the year strong.
Watching the Ball Drop
When we transition from year to year there is a distinct cut over on the calendar, but most other aspects of our lives do not change significantly as the ball drops in Times Square. This is also very true of the markets and economy. As we enter 2022, it is highly likely inflation will continue to make headlines, but we also expect employment and consumer spending to remain strong. Last week Personal Consumption Expenditures (PCE), which measures the change in prices of consumer goods and services, was reported as being 5.7% higher than a year ago. This is the Fed’s preferred measure of inflation and well above their comfort zone of 2-3%. Unless something dramatically changes, we expect this coming year for there to be a lot of activity from the Fed, such as adjusting interest rates.
The newly released Consumer Confidence Index indicates continued optimism amongst consumers for income, business, and labor market conditions and setting the stage for continued growth as we enter the new year. There could be headwinds to confidence and consumer spending from rising prices and an expected winter surge of the pandemic. Consumer spending looks to remain strong, especially for larger ticket items such as homes, appliances, automobiles, and vacations. We will also be watching retail sales numbers reported for the holiday season determining how robust spending was and if there were any supply chain issues.
As the yuletide cheer subsides and the holiday decorations are put away, let us not forget the memories created from the holiday seasons. The same can be said of the markets – we learned valuable lessons from years past and the last two are certainly no exception. We continuously use these learnings to position portfolios.
We hope the momentum seen in the markets continues and the Santa Claus rally stays intact through the end of the year. 2021 remains a solid performance for the stock market where the party can last past New Year’s Eve. We remain hopeful and optimistic for the year ahead but also feel investors will face different challenges than experienced in the recent past. As we look ahead, please do not hesitate to contact us should you want to review your portfolio or discuss our views on what might occur in 2022.
Wishing you all a very happy, healthy, and safe New Year!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
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