“I want the easy; easy money. “I want the easy; easy money. I could get lucky. Things could go right”
-Lyrics to Easy Money by Billy Joel
2021 was a year for the record books, as ever more fiscal stimulus from Congress and easy monetary policy from the Federal Reserve drove real estate, stocks and commodity prices significantly higher. COVID monetary and fiscal stimulus across the developed world was 2-3 times larger than similar stimulus after the 2008 Global Financial Crisis, and that’s before including the 2021 U.S. infrastructure legislation. The by-product of all this “easy money”: $1 trillion in positive U.S. wealth effect from rising stock markets, rising home prices and increased refinancing by homeowners. The S&P 500 finished the year up 28.7%, capping the large-cap index's best three-year stretch (+90%) since, gulp, the 1999 dot-com bubble.
Like 1999, the strong performance in large cap U.S. equities was primarily driven by unprecedented gains among the S&P 500’s largest tech stocks, though we did see a rotation out of the “meme” and “YUC” stocks (Young, Unprofitable Companies) and into more profitable stocks late in the year. Here are a few “easy money” highlights:
• The S&P 500 had 70 record high closes during the year.
• A record 450 exchange-traded funds launched in 2021. ETFs pulled in some $900 billion in new money, bringing the ETF total to $7 trillion (which include both stock and bond ETFs).
• Reddit's WallStreetBets forum, which launched the meme-stock craze, went from 1.7 million users in January to a year-end total of more than 11 million.
• Proceeds from IPOs totaled $118 billion, nearly double the previous record.
• A record 612 special-purpose acquisition companies, or SPACs, went public, raising $162 billion in the process.
Apple, meanwhile, is the first company with a $3 trillion market value. The iPhone maker rose 34% in 2021, one of several strong results for Big Tech companies. Microsoft was up 51% on the year, while Google-parent Alphabet rose 65%. Chip maker Nvidia, which now has a market value of more than $700 billion, soared 125%. We know we shouldn’t mention this in polite company, but the average Dow and S&P 500 stock is down 10% from its 52-week high to end the year. Divergences abound as the record index returns are largely driven by the 5 largest companies.
While these “easy money” policies helped the economy’s ability to adapt to the pandemic, inflation risks have significantly increased. In fact, global inflation is close to the highest level in 20 years, driven by surging goods prices, changing consumption patterns due to COVID, the inability of a just-in-time corporate sector to respond, energy policies which reduce the supply of thermal energy much faster than they reduce demand, and worker shortages. High inflation creates negative real rates of return for money market funds and bonds which are core components of diversified portfolios. The 10-year treasury rate increased from 0.9% at the start of the year to 1.5% by the end. As a result, U.S. aggregate bonds lost 1.5% in 2021, the first losing year in bonds since 2013. Could 2021 mark the turning point for bonds which have been aided by decreasing interest rates for nearly 40 years?
In contrast to 2020, small cap U.S. equities trailed their large cap peers with a 14.8% return, although this was still above the 20-year average of 11.0%. Outside the U.S., equities in developed markets also had another strong year with an 11.8% gain as the worldwide pandemic has led to similar “easy money” policies around the globe. Emerging market equities, on the other hand, lost 2.2%, following a correction in the Chinese stock market and continued lockdown measures throughout the region. With commodity prices increasing significantly this year, one would have thought emerging market economies and markets would have benefitted, but alas, that was not the case.
Outlook
Looking ahead to 2022, we expect a gradual fading of accommodative “easy money” policies in developed markets as the world gradually moves past the pandemic and begins to address the threat of inflation. We expect goods-related supply chain issues to be resolved, and for goods price inflation to moderate as a result. However, U.S. labor shortages appear to be a chronic issue, driving up wage inflation in tight labor markets. Worker shortages are the result of accelerated retirement vs trend, legal immigration declines, increased self-employment that draws labor away from where it’s needed, and COVID impacts (vaccinated people afraid to return to work, working parents unable to find childcare and unvaccinated workers furloughed). The latest data from the Bureau of Labor Statistics shows U.S. low skill wages rising at almost 7% per year, which is great for low skilled workers, but ultimately a drag on corporate profits and inflationary for the price of goods and services to consumers. Record highs in job openings are not just in leisure & hospitality but also manufacturing, transportation, warehousing, retail, professional business services, education and healthcare. Average hourly earnings and employment costs are rising 4%-5%, close to the highest levels seen in the last three decades.
For U.S. Stocks, we expect decent earnings growth in 2022 primarily due to the excess liquidity still flowing through the recovering economy, but also due to the ability of many companies to pass cost increases on to consumers. However, as interest rates continue to increase, we expect elevated P/E multiples to contract slightly as they did in 2021, which should result in positive stock market returns that pale in comparison to 2021. Contracting P/E multiples may be a bigger drag on Technology and Growth stocks than on high quality, high dividend paying Value stocks.
We expect bonds to underperform stocks again for the 16th time in the last 20 years as interest rates continue to increase, and we potentially experience back-to-back losses in Aggregate Bond returns this year.
International stocks are very reasonably valued relative to U.S. stocks and we would not be surprised if developed market and emerging market stocks eclipsed U.S. stock returns in 2022, though much will depend upon COVID/lockdown responses and overcoming the drag of significantly higher energy costs, particularly in Europe.
For 2022, all eyes will be closely watching the Federal Reserve and global central bankers to see if they can delicately manage the transition from the “easy money” policies in place since the 2008 Global Financial Crisis, to a policy to control inflation without stagnating the economy or roiling the financial markets.
If you have any concerns about elevated market, interest rate or inflation risks, or your overall allocation and positioning, please do not hesitate to contact us to discuss and review.
Introducing Our Newest Team Member
We’re pleased to welcome our new advisor Chris Rivers to the firm. Chris serves as a Relationship Manager supporting our Retirement Plan/401(k) practice acting as a central point of contact for retirement plan decision makers and plan participants. Designated as an Accredited Investment Fiduciary® (AIF®) by Fiduciary360, he has more than 25 years of experience working with company sponsored retirement plan sponsors, participants, and service providers. You can learn more about Chris on our website www.fncadvisor.com/Team . If you are a business owner and we don’t currently advise your company retirement plan, or you are a participant in a company with an unsatisfactory plan, please feel free to reach out to Chris for a plan review.
Upcoming Financial Webinars
This winter and spring, Alex Oliver will be conducting four complimentary webinars during the lunch hour EST. Even if you cannot attend the live event, registering will put you on the list to receive the YouTube recording one day later. These webinars cover several relevant topics that you may want to incorporate into your financial plan for 2022:
Investment Vision for 2022: Thursday, February 3rd, Noon – 1 PM
Cryptocurrency: The New Asset Class? Thursday, February 24th, Noon – 1 PM
How COVID-Era Tax Legislation Has Changed the Game: Thursday, March 17th, Noon – 1 PM
The Great Resignation: Planning for Your Early Retirement or Sabbatical: Thursday April 7th, Noon – 1 PM
To register, please visit www.fncadvisor.com/webinars, where we also have 22 past webinar recordings in our archive. We look forward to seeing you there!