Markets in Review for December 2021

PAUL TARINS, RICP®,WMCP®,CSRIC™

Stocks earned back their prior month losses in December to close at all-time highs for the year. However, those gains were hard fought up to the end, with the majority recorded within the seasonally favorable “Santa Claus” rally period. Supported by strong earnings, higher by +46% for the year on the pandemic reopening, the S&P 500 recorded seventy all-time highs and a third consecutive year of double-digit returns tallying nearly +90% over that period (Forbes, “S&P 500 Notches 70 All-Time Highs…,” 12/31/21). The last string of equally strong years was 1999, and we all know how that turned out. However, usually in this phase of the recovery cycle investors may continue to expect modestly high single digit returns. Markets have only seen annual returns like last year eighteen times since 1950, and 82% of the time they recorded follow-on gains. 

While 2021 went down as a tremendously positive year for US large-cap stocks, the fact is that the rest of the major style and capitalization indices produced more modest results. Although the S&P 500 finished +4.6% in December for a +28.7% (‘SPY’ ETF proxy) total return on the year, the more inclusive Russell 2000 index was up just +14.5% (‘IWM’) for 2021. 

Despite the much touted “reopening trade,” uncertainties around the longevity of that trade, various waves of Covid variants, and inflation and interest rate concerns concentrated returns into high-margin, high-cash holding technology powerhouses as an effective safety-trade. These stocks included such names as Apple, Microsoft, Alphabet, Tesla, and NVIDIA. This was ironic for a year that began with headlines of “meme” and “SPAC” stock issuances. Indeed, Goldman Sachs research shows that these five stocks alone accounted for more than one-third of the S&P 500 index’s total 2021 return (Yahoo! Finance, “5 Giant Stocks Are Driving the S&P500…,” 12/13/21). That same research note pointed out that stocks experienced weaker than average returns with greater volatility after past similar eras of narrowing market breadth. 

Overall, the distribution of returns for December reflected those seen over the course of the full year, with real estate and commodities taking the lead, followed by US stocks, and with fixed income falling slightly, as shown below.

Global Asset Class Returns December & Year-End 2021

Looking overseas, note that the strong US Dollar capped foreign developed nation returns at +11.4% (‘EFA’) for the year, while emerging market nations finished down -3.6% (‘EEM’), led by China’s decline. Among other asset classes, modestly negative fixed income returns featuring the Barclay’s Aggregate Bond index at -1.8% (‘AGG’) resulted in balanced global portfolios up just +9.7% -- healthy, but significantly below the headline numbers for the S&P 500. 

The concentration of returns into fewer and fewer stocks was a hallmark of the year and could foment interesting twists in the year ahead should differences in valuation revert to more normal levels. While earnings are expected to increase another +8.7% for 2022 (Forbes), we will be keeping an eye out for the possibility of continued rotations between growth and value and increased volatility in the year ahead as the federal reserve begins to remove its easy money policies against a backdrop of historically high valuations. While the economy remains fundamentally healthy, this could certainly make for a better year for tactical approaches than they have experienced for some time.

We have already seen this in the early start to the new year with a shaky start precipitated by sharp moves in interest rates after Federal Reserve meeting notes suggested an increasingly hawkish monetary stance that caught many investors off guard to start the new year (Wall Street Journal, “Fed Minutes Point to Possible Rate Increase in March”, 1/5/22). Whatever markets bring investors’ way, we wish you a happy, healthy, and prosperous new year ahead.  

Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.

Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.