In December, the S&P 500 finished another strong year, gaining 4.5% on the month and 28.7% for the year. Defensive areas of the market led during the month, as Consumer Staples, Real Estate, Utilities and Healthcare all gained 9% or more.
Despite the S&P 500's defensive posture in December, riskier assets won out through much of the remainder of the year. With unprecedented government stimulus and the U.S. Federal Reserve's low interest rate policies, investors were flush with cash and constantly rotated among sectors that were impacted by either COVID-19 disruptions or subsequent economic reopenings. Technology stocks gained 34.5% in 2021, reflecting investor sentiment during COVID-19 spikes and renewed talks of stay-at-home mandates. This growth is even more impressive considering the sector's 43.9% rise in 2020. Conversely, Energy (+54.6%), Real Estate (+46.2%) and Financials (+35.0%) saw very strong gains, mostly occurring during periods of accelerating economic growth.
Large Cap Stocks (S&P 500, +28.7%) were in favor in 2021, as investors preferred the safety of large U.S. companies with strong balance sheets and growth potential. Smaller capitalization indices like Mid Cap (Russell Mid Cap) and Small Cap (Russell 2000) underperformed, gaining 22.6% and 14.8%, respectively. International markets struggled with COVID-19 and supply chain disruptions. Developed International (MSCI EAFE) gained 11.8% and Emerging Markets (MSCI EM) dropped 2.2%. Fixed Income was challenged by rising interest rates, falling 1.4% on the year (Barcap Intermediate Govt./Credit).
Looking into 2022, investors will closely monitor the dynamics surrounding COVID-19, supply chains, inflation, and U.S. Federal Reserve policy. As the world endures another COVID-19 surge, the varying degree of government lockdowns will have an impact on global supply chains, which are already stressed. This has the potential to cause inflation to run higher, and could coincide with a period in which the U.S. Federal Reserve begins raising interest rates to more historically normal levels. The Federal Reserve will likely begin raising rates in the Spring, and will need to be mindful of inflation and an economy that is still feeling the impact of COVID-19.
Even considering the effects of COVID-19 and unresolved U.S. Federal Reserve Policy, we were encouraged to see a broad-based fourth quarter stock market rally. Broad participation is a strong signal looking into 2022. Additionally, in what might come as a surprise, there are historical trends supporting a positive 2022 for the market. Dating back to 1950, when the S&P 500 returns more than 25% in a given year, the following year has been positive 86% of the time, with an average return of 11.6% (LPL Research, Factset).
Overall, we enter the new year with a general level of optimism, but expect there to be volatility along the way.
We wish everyone a Happy New Year and a healthy start to 2022!