Now that the calendar has turned to 2022, we are focusing on the opportunities and challenges that may arise in the upcoming year. 2020 and 2021 felt like a fever dream for many. Both years seemed to be filled with turmoil, sickness, growth, and change. Meme stocks, multiple COVID-19 variants, Bitcoin, inflation, debt ceiling debates, and supply chain woes represent some of the most memorable moments over the last 24 months. Despite these factors, diversified portfolios had a stellar year across the board. In 2022, we could see continued growth and change, but at a more reasonable pace as things continue to normalize from the pandemic.
2021 was a year worthy to be called the successor to the wild ride that was 2020. On the positive side, employment, company profits, initial public offerings (IPOs), and business reopenings all improved at break-neck speeds. This helped to support stock returns in almost every category. On the other hand, high inflation, supply-chain woes, work from home trends, and general digitalization of economies across the globe caused significant disruption and volatility throughout the year. Despite the year’s strong returns, the whole process left many with whiplash, especially in the last few months. Overall, those who stayed focused on the long term despite the extreme volatility, particularly in February and March of 2020, were rewarded.
In terms of performance, the global stock market, as measured by the MSCI All-Country World Index, generated a return of 18.5% for the year. U.S. stocks outperformed foreign holdings, and large company stocks did better than smaller company stocks. Due to rising interest rates throughout the year, the Bloomberg U.S. Aggregate Bond index was down -1.5%. 2022 picks up where 2021 left off with a backdrop of persistent inflation and new variant concerns, but strong overall corporate and economic fundamentals. Inflation has proven to be more persistent than originally thought. The Federal Reserve, one of the biggest proponents of inflation being short-term, removed its “transitory” language in November. They also chose to reduce their treasury and mortgage bond purchases sooner and then signaled an earlier-than-expected increase in short-term interest rates in 2022. As if to support this move, November’s Consumer Price Index (CPI) came in at a staggering 6.8% year-over-year increase. This led many to believe we are entering an era of higher inflation for the foreseeable future. While we don’t disagree that inflation will be higher than it has been in the recent past, we still believe that elevated inflation is more of a short-term issue (next 12-24 months) than a long-term concern. Supply chain problems should eventually subside, while pent up demand from countries re-opening and recent stimulus should work its way through the economy, causing rising prices to moderate.
COVID-19 continues to be a concern across the globe. As we enter the third year of the pandemic, countries are beginning to lean towards policies that include safety measures in our everyday lives, as opposed to measures that stop our activity altogether. In addition, vaccination rates continue to rise, as well as natural immunity. Because of this shift, the travel and leisure industries continue to improve. These factors will help to mitigate COVID’s ongoing impact on the global economy as we all learn to live in our new reality.
Finally, there is a lot to be positive about in our current economic environment. IPOs in 2021 increased to four times the number of IPOs in 2019 and two times the level of 2020, signaling strong business activity. Profits remain at elevated levels and have increased at a historic pace over the past year and a half. The unemployment rate continues to come down, as of year-end it had reached 3.9%, nearing pre-pandemic levels. Manufacturing continues to improve and expand helping to meet global demand, and wage growth is increasing at the fastest pace in over a decade. Stock market valuations are higher than historical averages, but as we saw in 2021, profit growth can rise to meet those valuations. Overall, most signs point to reasons for optimism over the next three years, but with growth at a more moderate pace.
As we move into a new year and think about where we have been, I am reminded of a famous David Bowie quote “I don’t know where I’m going from here, but I promise it won’t be boring.” Above thoughts aside, 2022 is likely to carry its own surprises, if the past two years are any indication. Our hope is that everyone reading this has a year full of good health, happiness, and a successful investing experience!