Stocks finished the final quarter of 2021 at all-time highs. Supported by earnings that were +46% higher 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 ran from 1997 to 1999, and we all know how that turned out! However, generally in this phase of the recovery cycle investors may continue to expect high single-digit-plus returns. Markets have only seen annual returns like 2021 eighteen times since 1950, and 82% of the time they recorded follow-on gains.

While the year was tremendously positive for US large-cap stocks, the rest of the major style and capitalization indices produced more variable results. Although the S&P 500 finished up +28.7% (‘SPY’ ETF proxy), the more inclusive Russell 2000 index gained just +14.5% (‘IWM’). Overseas, a strong US Dollar capped foreign developed nation returns to +11.4% (‘EFA’), while China dragged down emerging market stocks to -3.6% (‘EEM’). Among other asset classes, modestly negative fixed income returns featuring the Barclay’s Aggregate Bond index at -1.8% (‘AGG’) resulted in balanced global 60/40 portfolios up just +9.7% – ­healthy, but significantly below headline numbers for the S&P 500.

Despite the much touted “reopening trade,” multiple waves of Covid variants, supply chain issues, inflation, and rising interest rate concerns concentrated returns into select high-margin, high-cash holding technology powerhouses as an effective safety-trade. This was ironic for a year that began with headlines of high risk “meme” and “SPAC” stocks. Goldman Sachs research showed that just five stocks accounted for more than one-third of the S&P 500’s total return (Yahoo! Finance, “5 Giant Stocks Are Driving the S&P500…,” 12/13/21). That same research noted that stocks have typically experienced weaker returns with greater volatility after similar past eras of narrowing market breadth.

The concentration of returns into just a handful of stocks could foment interesting twists in the year ahead should these differences in valuation normalize. While earnings are expected to increase another +8.7% for 2022 (Forbes), we will be keeping an eye out for the possibility of continued sector rotations and higher volatility in the year ahead as easy money policies are withdrawn against a backdrop of historically high valuations, elevated inflation, and slowing growth.

We have already seen a shaky start to 2022 precipitated by sharp moves in interest rates after the Federal Reserve hawkishly accelerated its plans to cease quantitative easing (Wall Street Journal, “Fed Minutes Point to Possible Rate Increase in March,” 1/5/22). Whatever markets bring our way, we wish you a happy, healthy, and prosperous new year.

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.