Winter 2022 Market Commentary
By Marc Usem
The fourth quarter of 2021 saw a remarkable continuation of what we have generally seen since the pandemic-related stock market lows of March, 2020. Global stock markets advanced by nearly 7%, with the U.S.-leading S&P 500 index gaining 11%. If that was the full year return we would be pleased.
But wait, there’s more – for the full year, we were rewarded with global markets jumping by 18.6% and U.S. stocks returning a blistering 28.7%. With hardly a hitch, the S&P 500 marched higher during the year. Only a 5% slide during September disrupted the market’s advance. A lack of volatility was surprising, and likely reflected the impact of the unprecedented pandemic-fueled monetary and fiscal policy on economic growth and consumer demand. Bond returns were flat during the fourth quarter, and down 1.8% from January to December, as interest rates rose by 60 basis points. (Bonds and interest rates move inversely with each other.)
The fourth quarter was characterized by significant weakness in the emerging markets index. The 1.6% decline was largely driven by China’s regulatory crackdown and real estate market disruptions. The emerging market index was also an outlier in a strong year, falling by 3.6%. This is truly a turn of events, as the emerging market index had matched the domestic market’s advance in 2020 and led global markets going into early 2021. This is a clear example of how geopolitical risks can have outsized impacts on international markets, especially emerging markets, and may strike without warning.
The S&P 500 index’s dramatic 28.7% advance in 2021 marked a historic event. It compounded the returns from 2019 (31.5%) and 2020 (18.4%) to double the index level in just three years – a 100% gain! The last time this happened was 22 years ago in 1999, as markets drove higher leading up to the tech bubble. But, today’s leading companies are not reminiscent of the tech bubble. Unlike the dot com shell companies with little revenue and no profits, today’s market leading stocks – Apple, Alphabet, Microsoft, and Meta – are generating tremendous revenue, profits, and free cash flow. However, 100% gains in three years is rare. The only other instance in modern history was in 1956 at the end of the 1950s “forgotten” bull market. This was a golden age for the economy. In post WWII America, energy was cheap, the country was having a baby boom, inflation was low, and the rich and the poor were moving closer together.
As much as we would love to see 2022 as a repeat of 2021, we do not expect that to be the case. We expect stock market returns in 2022 to be lower and more volatile than the recent past, as the Federal Reserve Bank works to normalize monetary policy against a backdrop of strong economic growth, rising inflation, and novel labor market dynamics. Additionally, bonds may be challenged to earn their coupon as we expect interest rates to move higher from still historic lows.
Similarly, we would note that the total return to a moderately conservative portfolio of 60% stocks and 40% bonds and cash compounded during the past decade was more than 11%. We do not expect the next decade to be a repeat of the past ten years. We recommend that investors temper expectations for returns during the 2020s, with half of the prior decade’s return likely being a good starting point.
The implications for financial planning are straightforward. Plan for lower expected returns than the past decade. Consider stress testing financial plans for different market environments. Review savings and spending rates to ensure they are commensurate with desired financial plan results. Continue to hold a globally diversified portfolio, remain focused on long-term goals, and expect the best while planning for less favorable outcomes. This remains the most prudent strategy.
Thank you for your continued confidence in our work.
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.