In this latest installment of our quarterly newsletter, we share our observations on the fourth quarter and full year of 2021 as well as our outlook for 2022. Click here to go to the full report on our website. Following are highlights:
- 2021 was an outstanding year for equity investors. Combined with strong returns in 2020 and 2019, it marked the S&P 500’s best three-year run since the mid-1990’s. The S&P 500 index returned 28.7% for the year, on top of gains of 18.4% in 2020 and 31.5% in 2019. And most of this occurred during a global pandemic, now going on its third year.
- The reopening of the economy in the spring of 2021, combined with increasing consumer confidence, robust corporate earnings, and accommodative monetary and fiscal policies, caused the markets to soar to new heights.
- The markets were even able to largely shrug off two new waves of Covid-19 variants, Delta in July/August, and Omicron in November/December, with a particularly noteworthy surge in the fourth quarter.
- We did, however, start to see a rotation by investors out of the high-growth stocks, which have long-dominated the market, into more defensive, value-oriented segments. Rising interest rates through the year had the effect of discounting the value of future growth prospects for many high-growth businesses, a trend we have seen accelerate into the new year.
- Rising rates also negatively impacted bonds, whose prices move inversely to interest rates. For the year, the Barclay’s Aggregate Bond Index returned a negative 1.5%, the first negative-return year for bonds since 2013.
- The Consumer Price Index (CPI), regarded as the broadest measure of inflation, soared to an annualized rate of 7.0% in December, far exceeding consensus expectations. This surge in prices appears to be less transitory, and part of a more long-term inflationary cycle than originally anticipated.
- To combat this, the Federal Reserve signaled in its most recent FOMC meeting that it intends to accelerate the tapering of its bond purchases and begin to hike interest rates, with three rates hikes indicated for 2022.
- A rise in rates does not necessarily signal the end of the bull market. We do anticipate, however, that the headwinds presented by tighter monetary policy will lead to increased market volatility.
- As we consider the new year, we believe stock returns in 2022 will again be driven by growing corporate earnings. The U.S. economy should continue in its mid-cycle recovery, marked by sustained expansion with moderate GDP growth, low unemployment, and solid corporate profits.
- On the other hand, we would not be surprised to see continued market volatility and even a market correction in 2022. Typically, corrections occur about once every year or two and we have not had a correction since the COVID-induced bear market in the spring of 2020. It seems likely that we will have a correction over the next year or two and we believe that the market will regain the losses from a correction within a few months, which is what usually occurs.
- We do not anticipate any major changes to our investment strategy, and we are actively pursuing new investment opportunities in areas we see as favorably positioned, like infrastructure and financial stocks. On the income side, we continue to favor dividend-paying securities like utilities, telecom, and real estate investment trusts, over fixed-rate bonds and Treasury securities.
- Overall, we believe in the durability of the broadly diversified portfolios we construct for our clients, and we expect them to perform well through a full market cycle.
Happy New Year from the Edgemoor Team!
