With a new year underway, we always find it worthwhile to glance into the not-so-distant past to help frame our expectations for the future. Undoubtedly, 2021 was a year of ups and downs (thankfully more ups than downs across equity markets!), so let’s reminisce quickly on some of the major turning points.
The year began on somewhat rocky footing for markets due to – you guessed it – ongoing disruptions from the COVID-19 pandemic, though widespread vaccine availability in late Q1 would help boost investor sentiment and guide the S&P 500 into plus territory for the quarter. The vaccine rollout also allowed for further re-opening of the economy as ongoing fiscal and monetary stimulus helped boost consumer spending which, in turn, supported corporate earnings growth. By the halfway point of the year, U.S. equity returns were well into double digits. Then came the inflation concerns, as supply and demand imbalances stemming from the economic re-opening coupled with supply chain disruptions seemed to fuel above average increases in prices of goods and services. Investors wrestled with these dynamics, leaving the S&P 500 more or less flat for the third quarter. In response, the Fed announced a gradual end to pandemic-related stimulus (commonly known as “tapering”) while an excellent Q3 earnings season helped to push equity markets higher to close the year even as the emergence of the Omicron variant took hold.
Where does all this leave us for 2022? We believe many of the same factors that emerged last year will continue to play a role in the new year. The Omicron variant may have some effect on Q4 growth, and as case counts remain elevated, it is becoming increasingly likely these effects would be felt in Q1 as well. It’s beyond the scope of this newsletter to speculate on the severity, but they do represent a risk. Additionally, inflation is already garnering headlines as we head into this new year – while pricing pressures may persist in the short term and inflation certainly warrants ongoing monitoring, our base case remains that it should return to more normal levels in the long term. With bond yields having risen due to Fed tapering but still low relative to history, a potential interest rate liftoff by the Fed as early as Q1 promises to bring challenges to the fixed income investment landscape. After a banner year for equities (in terms of both share price and profits), continued earnings growth will likely play a major role in supporting further equity returns. With the release of Q4 earnings and accompanying 2022 guidance already underway, it will be important to key in on both quarterly numbers as well as what companies are saying about the year ahead. Finally, with US growth stocks reaching a high level of valuations, investors would be wise to maintain allocations to both domestic value stocks and international stocks, where valuations are closer to historical averages.
The confluence of all these factors puts us at a familiar answer – stick to the plan. As always, we recommend never attempting to time the market. A disciplined, diversified investment plan is designed to provide favorable outcomes across market cycles, in good times and in bad. As we navigate this new year, we wish you a sincere Happy New Year full of health and prosperity. Please do not hesitate to reach out if you have any questions.