Here’s all you need to know. (If you’re in a rush.)
- The 2021 year-end numbers:
- US Stocks +25.78%
- International Large Cap Stocks +12.55%
- Emerging Markets Stocks -0.63%
- US Bonds -1.61%
- Real Estate +38.28%
- Commodities +30.33%
- Despite numerous headwinds, US stocks posted one of their best years on record, rising nearly 26%, while never falling more than 5% from all-time highs at any point in 2021.
- Two new variants of the virus that causes COVID-19 emerged, disrupting global supply chains and fueling high levels of inflation around the world.
- Gridlock in Washington took the US to the brink of defaulting on its debt obligations for the first time ever…once again. But it didn’t happen…once again.
- Congress passed a massive $1 trillion bipartisan infrastructure bill, which President Biden signed into law in November.
- Speculative market trends, like meme stock (GameStop, AMC) and high growth tech stock trading began the year on fire (in a good way) and ended the year on fire (in a bad way).
- Don’t take 2022 market forecasts seriously. Like every other year, market forecasters tend to be very bad at forecasting.
And now for the long(er) version…
The end of the calendar year is an investor’s cue to take a moment and reflect. What happened to your investments this year? What lessons did you learn that can make you a better investor going forward? After all, that’s what this is all about.
If you’ve been in the workforce less than about 26 years, 2021 was likely the best year you’ve ever experienced as an investor in the US stock market. While not the highest overall return even in the last three years, the S&P 500 posted a return of +29% (including dividends) on the year, while only ever falling 5.2% from all-time highs at any point in the year. Talk about smooth sailing.
But as an investor, the ride isn’t all about the end result—your returns. How we get there is often just as important because it determines how (and IF) you actually react in those tough moments. The ups and downs are where risk comes in, specifically in the form of market volatility. Simply put, when you account for risk (volatility), 2021 was one of the all-time best years for stocks. But while major indexes may have enjoyed an historically smooth ride throughout the year, for many individual investors, the story was very different…
The rise of inflation
Inflation became quite a buzz word in 2021. You couldn’t escape it. While the causes of inflation are often oversimplified and misunderstood, the end result of higher costs for many common goods and services became a growing concern throughout the year.
Just as the world was beginning to look past the COVID era, two new mutations of the coronavirus that causes COVID-19 spread around the globe, giving everyone a horrible sense of never-ending deja vu. Economies shut-down, travel slowed, and global supply chains came to a halt. All of this came as fiscal stimulus measures from governments around the world had given a major boost to household finances.
Higher incomes led to higher demand for goods and services at a time when supply chains were facing all kinds of bottlenecks – from material shortages to worker shortages and logistical gridlock in ports on every major continent. When supply shortages occur alongside demand spikes, it becomes a serious problem. Prices rise rapidly. And there you have it – Inflation.
But there is more to inflation than simple supply and demand. There’s a psychological component as well. As consumers start to worry about lasting inflation, they buy more products in anticipation of prices rising, which causes the supply shortages to worsen, increasing prices even more. Producers also begin to pass along their higher materials costs to the consumer by (you guessed it)…raising prices. It can become a self-fulfilling prophecy that is difficult to reverse. And that’s the situation we find ourselves in today.
From an investing standpoint, stocks are one of the best inflation hedges around. But in the short-term, markets tend to get spooked by the prospect of inflation getting out of control, and how the Federal Reserve may respond to fight back. In 2021, the overall market mainly shook off the idea and held strong, but individual investors may not have felt that way.
Looking forward, the Federal Reserve has indicated it will use its own tools to combat inflation in 2022, like raising interest rates. Certain asset classes, like high growth stocks, have benefited greatly from interest rates near zero for years now. That began to change late in the year, as inflation caused the Fed to shift it’s tone on interest rates and loose monetary policy.
Speculation heats up, and cools down
The COVID pandemic gave rise to a new era of retail trading. As new investors began to dip their toes in the investing waters (many for the first time), speculative stocks, crypto assets, and other alternative types of investments skyrocketed in popularity.
In early 2021, the era of speculative mania hit a peak, as retail investors pushed what became known as “meme” stocks, like GameStop and AMC, to astronomical valuations. Some were able to get out early, but far more held on as this and many other speculative bubbles in the market began to pop later in the year.
By year end, many individual stocks, including meme stocks and high growth tech stocks that had benefited greatly from the “remote work” shift around the world, fell dramatically back to Earth. Some stocks that had risen hundreds or even thousands of percent in a matter of months, had given all those returns back by the end of December.
There’s a lesson here that seems all-to-obvious in hindsight. In the moment, however, a fear of missing out can be impossible to ignore and getting caught in market manias like we’ve seen in the past two years has become easier than ever. The lesson – beating the market is darn near impossible, so why bother?
Obviously, there are several reasons why investors gravitate towards chasing short-term returns rather than choosing a proven and passive, long-term strategy and sticking to it. Passive investing is boring. But it also has an impressive track record that’s not so boring.
Politics and gridlock…mostly
We can probably go ahead and just copy and paste this section into every calendar year recap we publish. The lesson every year? Don’t mix politics and investing. Just don’t. Political uncertainty is a never ending certainty in investing. 2021 was no exception to this.
We began the year with an unsuccessful attempt to overturn the 2020 Presidential Election at the US Capitol. Then began months of back and forth debate on a series of massive spending bills targeted at repairing and upgrading US infrastructure and social safety nets.
All of this came to a head with yet another debt ceiling crisis that took the country to the verge of defaulting on its debt obligations for the first time in history. If this sounds familiar, it is. We go through this every couple of years. Luckily, with the same result – some sort of compromise that kicks the can down the road again. But at the end of the day, the 2021 version of this debacle only gave the market a slight scare in the fall.
While political gridlock defined much of the year, there was some compromise with the passing of a bipartisan infrastructure bill, which was signed into law by the President in November. The unprecedented price tag of the bill is expected to provide another boost to an already red hot economy in the coming years.
While, arguably, a much needed effort for rebuilding our nation’s crumbling infrastructure, there are certainly some shorter term concerns as to how this level of spending may add fuel to the inflation fire. Markets again seemed to take this in stride and specific sectors like materials, construction, and alternative energy stocks responded with large rallies as passage of the bill became more and more likely.
As is the case at the beginning of every new year, predictions of what the market will do in 2022 are all over the place. Ignore them. It’s nearly impossible to find any predictions from headlines for the prior year that played out as expected. Of course, this is true nearly every single year.
As a long-term investor, 2021 provided some good lessons and reinforced some important old ones too. In a year where so many pockets of the market were on a wild roller coaster ride, investors that kept things simple and stuck to a consistent plan of making regular contributions to broadly diversified index funds (where available), likely did very well.
There are many reasons to be optimistic for 2022, but also many to be cautious. Stock market corrections (declines of 10% or more) are normal and should be expected fairly often. In fact, historically a 10% correction has occurred in the US stock market once about every year and a half. The lack of volatility in the overall market in 2021 was the exception, not the rule.
And also, while downturns should be expected, it’s important to remember that markets do tend to bounce back VERY quickly…
- Bull markets = stocks in upward trend
- Bear markets = stocks in downward trend (decline of 20% or more)
- You simply cannot successfully time these things. No one can.
If you have years or even decades until you plan to retire, remember this – volatility is the price an investor must pay in order to achieve the high returns stocks have consistently provided throughout history, relative to nearly all other asset classes. After all, in order to have high returns over time, you need to be able to invest at lower prices from time to time.
While the very thought of your balance declining 10%+ may give you heartburn, and truly is painful to experience in real-time, remember that a market that only goes up doesn’t benefit the long-term investor as much as a normal, healthy market that has some hiccups along the way.
On behalf of the entire blooom team, we wish you a safe, happy, and financially confident 2022!
The information is provided for discussion purposes only and should not be considered as advice for your investments. Past performance is no guarantee of future results. Please consult an investment advisor before you invest.
Published on January 28, 2022