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     Entrepreneur Kurra Bewarse Username: Entrepreneur Post Number: 3855 Registered: 05-2011 Rating: N/A |
2021 Year in Review 2021 started on the most contentious of notes in our nation's capital, but like everything else this year, the stock market managed to work its way through it with a bullish bias. The capacity to do so was fueled by the persistence of low interest rates, the persistence of fiscal stimulus, the persistence of strong earnings growth, and a persistent belief that the worst days of the COVID pandemic are in the rearview mirror for the global economy. There were some setbacks every now and then, but time and again those setbacks were greeted with buying interest. As the year drew to a close, both the S&P 500 and Dow Jones Industrial Average hit new record highs and the Nasdaq Composite was knocking on the same door. In brief, 2021 was a great year for the stock market, which spun on an axis of rotation between growth and value, small caps and large caps, cyclical sectors and counter-cyclical sectors. In the end, there were no losers at the sector level or the index level. Making Waves The S&P 500, powered by the mega-cap monoliths otherwise known as Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Meta Platforms (FB), Tesla (TSLA), and NVIDIA (NVDA), was the biggest winner, gaining 26.9%. We didn't forget Amazon.com (AMZN), but it looked like investors did. AMZN was up just 2.4% for the year. To be fair, Amazon had some very challenging comparisons to the 2020 pandemic year. The same was true for Walmart (WMT), which was up just 0.4%, and the stay-at-home darlings, otherwise known as Zoom Video (ZM) and Peloton (PTON). They declined 45% and 76%, respectively. All boats, then, didn't rise with the bullish tide, but the biggest boats did and they towed a lot of tug boats in their wake. The biggest waves, though, were made by a regatta that was collectively known as the "Reddit crowd." That was a catch-all description for the retail trader who had the means, the platform, and the narrative to drive so-called meme stocks to parabolic levels that were grounded more in crowd psychology than fundamentals. GameStop (GME) and AMC Entertainment (AMC) were the poster children for this movement. The former went from $17.69 on January 8 to as high as $483.00 on January 28. AMC for its part went from $12.08 on May 21 to as high as $72.62 on June 2. GME currently trades at $148.39 while AMC currently trades at $27.20. 2021 will be the year when "meme stocks" became a thing, but there was nothing new about the speculative fervor. That has been around since the stock market was founded more than 200 years ago. What fueled the speculative fervor was the persistence of low nominal rates, negative real rates, and a Federal Reserve that suggested time and again that it would not be in a hurry to raise rates. Fed Got What It Wanted... and Then Some That viewpoint and the passage of additional fiscal stimulus in March, as well as a $1 trillion infrastructure bill in November, drove what at times seemed like an insatiable appetite for stocks. It fueled an explosion of debt issuance, record-setting M&A activity, a flood of IPOs, and the proliferation of SPACs (special purpose acquisition companies). It drove thematic investing in areas like EVs, cloud computing, and clean energy, a surge in the value of cryptocurrencies and NFTs, and an unyielding belief that there is no alternative (T.I.N.A.) but to own stocks in such a low-yielding world. It also helped stoke inflation, which is what the Fed wanted but ultimately underestimated as consumer demand for goods roared back, pent-up demand for travel was unleashed, housing demand was at a fevered pitch, and a world still afflicted with COVID couldn't produce enough to meet that demand or deliver enough goods in a timely manner. A shortage of semiconductors made the automotive sector a poster child in this regard. Used car prices skyrocketed because of a lack of supply of new cars. The supply chain issues, labor shortages, and transportation bottlenecks hit far and wide, however. The confluence of these problems has registered in the highest consumer inflation rate (6.8%) since 1982 and the Fed's disavowal of the view that inflation pressures would be "transitory." The Fed's newfound perspective on inflation led to a stark pivot in its messaging as 2021 was coming to a close. The approach now incorporates a plan to speed up the pace at which the Fed tapers its bond purchases, such that those purchases should be complete by March 2022, and an allowance for the possibility of three rate hikes in 2022. That pivot fostered an increased pace of selling activity in many of the more highly-valued, and unprofitable, growth stocks as 2021 drew to a close -- but it did not derail the broader market nor did the arrival of the Omicron variant in late November. At first, Omicron triggered a fear that it would be resistant to vaccines and ultimately more virulent than the Delta variant. It soon became apparent, though, that the Omicron variant was producing only mild, cold-like symptoms and that current vaccines, and a booster shot, were proving to be quite effective in preventing severe disease and hospitalization. The market used this understanding as a basis for a relief rally in December that saw the S&P 500 gain 4.4%, leaving it up 10.7% for the fourth quarter. A Hallmark Moment Yes, the stock market did in the fourth quarter what many would consider to be a good year -- but it was that kind of year. The same rang true for earnings growth. It was one good quarter after the next with actual results comfortably exceeding expectations. Helped by easy comparisons, earnings growth for the S&P 500 was 52.8% in the first quarter and 92.4% in the second quarter. Third quarter earnings growth was 39.9% and fourth quarter earnings growth is projected to be 21.1%, according to FactSet. Low interest rates, strong earnings growth, and lots of available cash is as good a combination as any for the stock market and investors made the most of it, favoring value stocks when the economic outlook seemed brighter and growth stocks when it didn't. The key, however, is that money rotated within the market most days as opposed to rotating out of it altogether. That is a hallmark sign of an enduring bull market. Fittingly, the S&P 500 delivered 70 record closing highs in 2021, trailing only 1995 in that record-setting pursuit when there were 77 closing highs. Powell Back at the Helm The U.S. economy fared quite well, too. Real GDP growth was 6.3% in the first quarter and 6.7% in the second quarter, but only 2.3% in the third quarter as the effects of the Delta variant and fading fiscal stimulus payments hit home. The Atlanta Fed's GDPNow model estimate for real GDP growth in the fourth quarter is 7.6%. The unemployment rate, which began the year at 6.7%, stood at 4.2% in November, and yet there were still a record number of job openings. A flattening yield curve as 2021 was winding down has fostered concerns that the economy is poised for a noticeable slowdown in 2022 as the fiscal impulse fades, and possibly because the Fed gets too aggressive with its rate hikes in an attempt to rein in inflation. The 2-yr note yield, which started the year at 0.12%, ended the year at 0.73%. The 10-yr note yield, which started the year at 0.92%, ended the year at 1.51%. Fed Chair Powell will be back at the helm managing the policy approach. He was re-nominated by President Biden and will face a confirmation hearing (which he will pass) in January. Fed Governor Lael Brainard was nominated to be Vice Chair and she, too, is expected to be confirmed for that post. Something that didn't get passed in 2021 was the $1.75 trillion Build Back Better Act. Senator Joe Manchin (D-WV) would not provide his necessary support in a split Senate, having objected to its cost, various proposals in the plan, and its potential for making inflation worse. Democrats are reportedly going to try to re-work the Build Back Better Act in early 2022 to satisfy Senator Manchin, but insomuch as 2021 is concerned, the Build Back Better Act was left in the blueprint phase. Going Green Blue is how Democratic leaders might feel in not getting the Build Back Better Act passed before the end of 2021, as they hoped it could be, but with all of the green seen on stock monitors, investors have many reasons to feel happy when the ball drops tonight in Times Square and ushers in 2022. Things weren't perfect in 2021, yet the stock market's returns in 2021 were every bit as perfect as they have been in some time thanks primarily to the persistence of low interest rates, strong earnings growth, and the resurrection of animal spirits. To be sure, 2021 will be tough to top in 2022 and perhaps for many years to come. |