2021: Year in Review

Markets sold consistently across the week. Is there more red to expect in coming weeks?

Monday S&P 500 1.20% | NASDAQ 1.79%

Happy Tax Day! Retail sales expanded more than expected in March. Three major companies reported earnings, all three met expectations, all of which were financials. This was not surprising as financials usually head up earnings season. They also give us a good indication of how earnings season should go. Retail sales, however, took center stage as a strong consumer reduces the need for Federal Reserve Board (FRB) rate cuts. This caused an outsized move downward as investors anticipate less stimulus for 2024.

Tuesday S&P 500 0.21% | NASDAQ 0.12%

Housing data for March came in weaker than market expectation. Ten major companies reported earnings, with two missing expectations. Although mild, the losses continued. FRB Chair Powell indicated that inflation’s recent strength does not give the board confidence to start easing policy.

Wednesday S&P 500 0.58% | NASDAQ 1.15%

11 major companies reported earnings on the day, with three missing expectations. Focus was squarely on earnings as there was little economic data on the day. Tech stocks took a hit as AI chip orders for a specific company did not meet expectations. As would be expected this hit the tech heavy NASDAQ harder than the S&P 500.

Thursday S&P 500 0.22% | NASDAQ 0.52%

Initial unemployment claims remain benign. Existing home sales also slowed in March. 11 major companies reported earnings on the day, with one missing expectations. Markets were down for the day, but in a less dramatic fashion. Robust employment data typically is not favorable information when hoping for an FRB rate cut (as investors are).

Friday S&P 500 0.88% | NASDAQ 2.05%

Six major companies reported earnings on the day, with one missing expectations. NASDAQ led the way lower as Tech and communications got hit hardest. The best performers on the day were defensives, like utilities, healthcare, staples, and also financials.

Conclusion S&P 500 3.05% | NASDAQ 5.52%

The week was bloody. There was not a single up day for the S&P 500 or the NASDAQ Composite. The moves were not founded in fundamental data, as earnings did well. Some forward guidance shows warning of slowing revenues throughout the year, but that is normal for the last two years. Economic data, which signals the economy is doing well, has actually pushed stocks lower. The stronger the economy, the less likely the FRB is to act in reducing rates. The sell-off has extended to approximately 6%. It may take a breather in the coming days but expect that we are not done.

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In many ways, 2021 felt like two years in one. Investing was no exception. Here is a review of the year from our perspective at FFS and what we are looking for from 2022.

Q1 2021

GameStop stole the show early in the year. In an anomaly, a group of Reddit traders took a reasonably good January (up about 3%) and wreaked havoc. The trade was clever, but greed eventually collapsed the trade and caused January to be a down month.

Mass roll out of vaccines dominated the headlines early in the year. People became excited on the hope of a return to normal life. This led to an expectation from investors that GDP was going to grow substantially in 2021. The thought was, as we got back out and spent money, the economy would boom. This led to what was affectionately referred to as the “re-opening” trade.

Q2 2021

The re-opening trade led to concerns about inflation increasing at a fever pitch, at least for a short while. The key term used by the Federal Reserve Board (FRB) repeatedly was transitory… Inflation rose 0.8%, 0.6%, and 0.9% across the quarter and 5.4% YoY through June.

The second quarter also gave us the Delta variant, which proved more virulent than earlier versions of COVID. The onset of Delta put a dampener on the expected re-opening boom over the summer. In effect, this held high inflation at bay… a little.

Q3 2021

As Delta occurrences faded after a few months, focus shifted sharply to supply line disruptions. The Bay of L.A. saw a point where around 86 freighters were anchored in bay waiting to be unloaded. The disruption caused what was expected to be transitory inflation to become more persistent.

September was a busy month for investors. A crisis in Evergrande debt, China’s energy demand, and debt ceiling debates gave reason for pause on equity markets. The S&P 500 fell by as much as 6% intra-month, which was the largest fall for the year.

Q4 2021

Fourth quarter is usually a quarter for growth as the consumer generally has a strong showing, courtesy of the holidays. October saw a market surge as the debt ceiling debate was pushed off to December. Helping matters were corporate earnings from Q3 that largely surpassing estimates.

Jobs perpetually improved across the year and inflation was firming. In response, the FRB decided to start cutting back on the amount of bonds they were buying. Rather than running in fear, the markets applauded the move (by increasing). It was viewed as the FRB avoiding the mis-step of waiting too long to act.

What would be a quarter without COVID, right? Thanksgiving Day the WHO announced a new variant out of Southern Africa named Omicron. This announcement killed any growth seen in November. As December unfolded the news coming out about Omicron was fairly positive. Yes, it was more infectious, but its symptoms appeared to be milder. As a result, there was less fear that Omicron would cause full blown shutdowns and markets regained composure.

2021 Summary

2021 proved to be a profitable year. It represented the first calendar year post recession. Historically year 2 (2022) is a good year as well, but there is a likelihood of diminished returns from 2021. Additionally, 2021 proved to have very low volatility. Something that is likely not to be repeated in 2022.

2022 Landscape

Inflation has persisted, but Q1 should calm down as consumers are historically dormant this time of year. Additionally, the reduced consumption will likely help the supply bottlenecks get cleared up. Yes, the bay of L.A. is still backed up.

Full employment is likely already upon us. December unemployment hit 3.9%. A level historically seen as “full” employment. This means rate hikes are not only a consideration, but a likelihood starting as soon as March. The FRB wants to get ahead of inflation, and they cannot do that without removing accommodation. Additionally, full employment gives them the freedom to focus on inflation.

This environment of FRB rate hikes will likely lend to heightened volatility throughout the year. The lack of a correction last year could mean one early this year. This would allow focus to shift to a strong earnings year and as a result, a strong stock year.