2022 – A Year of Muted Growth
Stock Market Returns 2021
Stock markets saw their third straight year of growth in 2021. Indexes posted double-digit gains. And corporate profits were bolstered by strong consumer spending. S&P 500 earnings were up nearly 45% year-over-year. And the S&P 500 closed at record highs a total of 70 days.
Portfolio Performance 2021
Well balanced portfolios likely saw a year of double-digit gains. US Large Caps led the way, followed by strong gains in commodities and US Midcaps. Bonds, for the most part, provided modest performance this year. High yield gained 5%, while investment grade bonds fell >1%, as interest rates rose modestly. Note that investment grade bonds returned >5% over the last five years.
The value versus growth stocks debate remains unabated. However, growth investments outperformed value investments – again. Value stocks mounted a comeback in early 2021 as the world “reopened” and interest rates were rising, but the progress was short-lived. After 4 months of underperformance, growth stocks regained the lead. Past the COVID-induced market downturn through the end of 2020, growth stocks delivered a 1.5x greater return than value. The trend continues into 2022 with growth outpacing value at a similar rate of return. Look at the Vanguard Russel 1000 Value ETF (red) versus Vanguard Russel 1000 Growth ETF, which illustrates this point.
Despite the comeback of growth, it was still a true comeback year for value, which returned nearly twice the annual average of the past decade.
What sectors were hot? How many of you picked energy? No – not the alternative mix, although there were some standouts here, but the Upstream Oil & Gas sectors that led the way. Energy gained more than 45%, compared to a 10-year average of roughly 1% per year. Financials rose 30+%, benefitting from a steepening yield curve and surging economic growth. Technology, led by mega-cap names, also returned 30+% in 2021.
Performance by Asset Class 2021
S&P Performance by Sector 2021
It was also a record year for the public markets. 2021 was a record year for both the number of IPOs and the amount of capital raised. More than 700 SPACs went public in 2021, which is 5 times more than the number from the year before. The 5 biggest IPOs of 2021 were Coinbase (“COIN”), Roblox (“RBLX”), Wise (“WIZEY”), Rivian (“RIVN”), and Kuaishou (“KSHTY”). Others big names included Blue Owl Capital, Warby Parker, GlobalFoundries, SoFi, Bumble, Lucid Motors, and Robinhood Markets.
All yet all of this has proved confounding in a year of acute economic challenges. Volatility ran historically cool. Inflation soared to a 40-year high, as the Fed now stands ready to pivot towards three or more rate hikes starting in March 2022. We continue to deal with the fallout from a wave of omicron infections. And the Build Back Better spending plan remains stalled, having crashed into a familiar obstacle on voting rights. Pullbacks were shallow and equity markets looked past these risks with a “buy the dip” mentality. 2021 was one of the few years without a broader market pullback larger than 5%.
Largest Intra-Year S&P 500 Pullbacks (1990-2021)
GDP Growth 2021
Economic growth was largely attributed to the climb out of 2020’s pandemic-induced hole. The growth that emerged was the strongest since 1984, reflecting strong consumer demand dynamics, healthy housing, and labor markets.
2022 – Where are We Headed?
Keeping up the streak in 2022 may prove challenging in the face of an uncertain pandemic and less supportive monetary policy. Yet, the underlying narrative remains positive. Expectations remain for a continuation of corporate revenue, earnings growth, and cash flow generation for 2022.
It is the year-over-year that is going to become tougher. The markets sit amidst a backdrop that favors moderate growth and market performance. We expected muted gains in the coming year with contractions in P/E multiples from current elevated levels.
Although fundamentals remain firmly in place, we predict the market will experience a larger correction in 2022 when compared to 2021. However, the correction may be viewed as a buying or rebalancing opportunity.
Inflation has the potential to remain high in 2022. And, historically, inflation has proven to be sticky when the Fed sits behind the curve. Tighter Fed policy may create a headwind for growth.
Healthy household finances and consumer spending can keep the economy on track to grow at a clip greater than 3%, albeit a far cry from 2021 GDP. This year, U.S. GDP grew at a real annualized rate of 6.4% in the first quarter, then 6.7% in the second and 2.1% in the third, based on the latest estimate for the quarter. The Omicron variant has forced global investment banks, such as Goldman Sachs and Bank of America, to lower GDP forecasts for 2022. All of this is to say that next year will be one of rebalancing. Both GDP and inflation are likely to decelerate from current levels.
Many analysts believe labor shortages and supply bottlenecks may begin to clear in the back half of 2022. I cannot say that we, at The Investor Weekly, agree with this. We believe the supply chain disruptions will last well into 2023. In many respects, demand for workers has recovered, but the number of willing workers has not. Since the summer of 2020, the labor force participation rate, has barely moved. There are roughly 3.5 million fewer people employed than there were two years ago.
Cryptocurrencies no longer exist on the fringe. Research shows that nearly half of Americans are “familiar” with crypto, and of this demographic, nearly 30% own cryptocurrency already, with another 12 % planning to buy it in the coming year. That is nearly 15 million Americans that plan to buy crypto in 2022.
The IPO market may also cool slightly in 2022. Many of this year’s  IPOs haven’t performed well in the public markets.
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We believe that the markets will reward diversification and balance. This year we continue to invest in growth names, but the focus will be on Growth at a Reasonable Price (“GARP”). GARP investing combines growth and value investing attributes. More to come on this in another article. Both value and cyclical investments will make up a larger percentage of our portfolio this year, as economic momentum continues.
Wall Street Journal