For investors, 2021 was a happy year. Ron Rough, Chief Investment Officer, reviews what happened in the markets in 2021 and discusses factors that might play a role in 2022.
January Stock Market Update Transcript
Hello. This is Ron Rough with the market update video for January. Happy new year to everyone. And for investors, 2021 was certainly a happy year. Looking at this table in front of you, you can see that at least for U.S. investors, stocks did very well last year. Both the Dow and the S&P were up over 20%. Now, if you look at other areas in the markets, not as good. You can see from this table, small caps are only up 15%. If you go overseas, foreign stocks were only up around 11%. Emerging market stocks were actually slightly down for the year. Gold was negative as well. Surprisingly, precious metals in general – gold, silver, platinum – were all down, but commodities in general, besides precious metals, all did really well, up over 20%.
And then it was not so good for bond investors. The more aggressive high yield bonds were only up 5%. We would expect those to be up double that in a year when the market was up, when stocks were up over 20%. And you can see high quality bonds were actually slightly negative for the year. So really, last year was a year to be in the U.S. market and predominantly the big name companies that we all know.
And why was that? Why was last year such a good year? Well, if you think about it, we had progress. The vaccine development and widespread distribution of the vaccine, that had a huge positive impact on sentiment in the markets. As well, the economy continued to recover from the lockdown from 2020. And then thirdly, of course, the Fed continued to be very accommodative and a lot of money coming into the economy and into the system and some of that money ending up in the stock market. So not surprising that last year was a very good year, in particular, for the big multinational U.S. companies.
What’s interesting, too, is that we’ve now had the years 19, 20, and 21 are actually the three strongest years in the U.S. stock market, at least for the S&P 500, since the tech bubble back in the late nineties. So I’m not making any inference there that we’re going to have a repeat of that, but it is interesting that it has been three very strong years in spite of this pandemic.
So now as we’ve stepped in, we’re about two weeks into the new year as I’m recording this, what thoughts do we have about the year of 2022? It’s the way we look at the world, so if you see this next chart, we’re primarily technical in nature, which means we’re looking at chart patterns for the markets in general and for individual securities. And if you look at the chart of the S&P 500 over the past couple years, you can see it’s a pretty good uptrend. So you would want to be pretty positive overall as we step into this year.
This next chart, however, which is looking at the average stock, it’s the value line index, so it’s not so much dominated by the big names, but it’s more of a broader average of 1,700 names. You would also say, I would make the case that this is also in an uptrend, but it’s been pretty flat and choppy since last spring. So that is one of the issues that we’ve had. And we’ve talked about it in these updates for the past two or three quarters, this breadth. A handful of big stocks are continuing to do well, but the average stock under the surface continues to struggle.
So that’s one of our issues. But overall in the U.S. market, we have to be fairly positive with where the market is, and we’ll just have to see where we’re headed. In terms of looking forward into the future, of course no one knows, but a fun chart that Ned Davis puts together each year is they do a cycle forecast, and that’s what you’re looking at here. And how they derive this chart is three ways. They go back to 1928 and just take the one year average path of the stock market going back 80, 90 years. And then they look at the four-year presidential cycle. 2022 is the midterm election year. And so they take all of those midterm election years going all the way back to 1928 and calculate that average market path. And then finally, they look at all years ending in 2. 2022, 2012, 2002, 1992, so on, back to 1928, and look at that pattern. And then they average those three results. And that’s what you have in this chart here.
What’s interesting about it, of course, is going from this chart, you see pretty choppy beginning to the year, followed by weakness through into summer, and then a rally in the second half of the year. So overall the takeaway from this chart would be kind of, for the most part, a pretty difficult year, but could certainly finish positive by the end of the year, and certainly things will get better in the second half than they could be in the first half. So it’s kind of a fun way to think about what could happen, but obviously no one knows, and things can come in and change the course of the market.
What things that could be playing a role this year would be, as we look at it, number one, the path of the coronavirus. Are there any new variants that come out? Do we continue to get immunized and inoculated against the various variants that are out there? The other interesting thing that’s going on this year that we think is very important is the Fed is now beginning to taper, that is, they’re beginning to reduce the amount of bond purchases they’ve been doing for the past several years. This, in our opinion, is going to have a pretty marked impact on how much liquidity is in the market. So that, to us, is a pretty significant change and could very much support a more difficult year, such as what this chart is suggesting.
And then the third thing, and I’ll let this final chart, we’ll bring this up, is we’re in a midterm election year. And historically the second year, the midterm election year is one of the weaker of the four election years. And the reason for that is obviously we have an election coming up and there’s a lot of uncertainty that comes from that. Looking at this chart, you can see that I just took the last four midterm election cycles, and you can see that, at least through the periods that I marked here, in all four cases, we were only looking at low single digit returns by October, September, late July, what have you. So midterm election years tend to be very choppy, certainly at the beginning. What’s interesting is with the exception of 2018, where the market was down a little bit for the year, the other three years, at least for the S&P 500, all finished double digit gains. So the fact that things could be difficult in the first half of the year doesn’t mean that we can’t finish with gains, but certainly it’s our expectation that this could be a much more difficult first half of the year, certainly than we saw last year.
But as you know, we do not follow forecast. We let the direction of the market tell us where to go. We’re always flexible and adaptable and will react as the market environment takes us. Currently, the portfolios are mostly pretty fully invested, very low cash across all the strategies, but obviously that can change pretty quickly as the market environment dictates.