AC-CENT-TCHU-ATE THE POSITIVE, Words by Johny Mercer.
“You’ve got to accentuate the positive
Eliminate the negative
Latch on to the affirmative
Don’t mess with Mister In-Between …”
U.S. stock markets recorded their third year of consecutive gains in 2021, with the major indexes posting double-digit returns and the S&P 500 Index was up a whopping 28.7% on a total return basis. Investors “ac-cen-tchu-ated” the positives of economic recovery and vaccine rollouts. While vaccines were not the permanent panacea many had hoped for, they still served as a major stepping stone for reopening and the reversal of lockdown measures, leading to a return to work, school, and some normalcy, while also fueling a wave of pent-up demand.
The celebratory tone on Wall Street at year-end was contrasted by the somber mood of many Americans facing yet another wrinkle in the pandemic, the rampantly spreading, highly transmissible omicron variant. Supply chain disruptions and a flood of economic stimulus have inflation soaring to 40-year highs, with the Consumer Price Index (CPI) rising to 6.8% in November. While this is good news for Social Security recipients and those with COLA adjustments, price inflation and a wobbly labor market challenged by covid outbreaks, is not positive news for most.
Ironically, Corporate America, as defined by earnings is doing well, recording record earnings and profit margins amid the sharp economic rebound. According to FactSet, corporate earnings are projected to be up 45% year-over-year for S&P 500 companies. The winning combination of vaccines and a growing acceptance of pandemic realities have kept markets focused on the positives and shrugging off the negatives. Even a new variant derailing travel and the return to the office, could not keep markets down.
That is not to say that market breadth is all rosy. Liz Ann Sonders, chief investment strategist at Charles Schwab, points out that 93% of companies in the S&P 500, and 89% listed on the Nasdaq have seen their shares slide more than 10% at some point this year. But pockets of weakness have been offset by pockets of strength.
A New Breed of Investors
A new breed of internet-enabled, work-from-home traders, has fueled a hefty appetite for market risk and speculation as evidenced by the Reddit-fueled ride propelling so-called “meme stocks” like Gamestop and AMC. Cryptocurrencies have also exploded in popularity and become mainstream investments.
Initial public offerings also hit a record high in 2021, boosted by a flood of SPACs (Special Purpose Acquisition Companies, aka Blank Check Companies) and direct listings. According to FactSet, of the more than 1000 companies that went public on U.S. exchanges this year, 53% were SPACS.
Global inflows into ETFS surpassed $1 trillion in 2021, as the sun continues to set on the active mutual fund era. Clearly, ETFs have won over advisors and investors with their lower fees, greater transparency, and tax efficiency.
Fed Tapering Plans Initiated
Early in the year in March, a $1.9 trillion stimulus package was passed, including cash payments, extended unemployment benefits, and child tax credits. But now, with things getting back to some state of normalcy, the Federal Reserve must pull back some of this economic support to thwart inflation. In November, the Fed announced it was tapering its purchases of Treasuries and Mortgage-Backed Securities and doubled the pace of tapering in December. In addition, the Fed has suggested it will increase interest rates at least 3 times in 2022.
Outlook Ahead for 2022
Especially in light of new variants, the global economy remains far from healed. So what lays in store for the year ahead? It appears we are still in the early innings of economic normalcy, which bodes well for corporate growth prospects in the coming year. And the hope is that as supply chains also return to normal, prices will come down and high inflation will be averted. The Fed seems poised and ready to raise rates as needed to curb inflation, without undermining the economic recovery. All of this is a lot to navigate, and as a result, market projections are all over the place. Morgan Stanley and Bank of America are bearish, expecting the market to decline in 2022 after 3 years of rising.
But other firms such as Oppenheimer, BMO, Credit Suisse, and Goldman Sachs, expect the market’s party to rage on. Supporting the positive case is that the International Monetary Fund (IMF) is projecting 4.9% global growth for next year. Given that the new variant appears milder than originally feared, restrictions are likely to be muted without huge economic ramifications.
Treasury yields are still only at 1.7% on the 10-year treasury which is still historically very low and should not adversely impact equities. That being said, on the fixed income side we are advocating for interest-rate hedged and inflation-hedged fixed income positioning to mitigate risk.
Here’s is hoping that 2022 is even better than 2021 and that we can all get back to the normal business of living.
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