December Market Recap

January 3, 2022

As we look ahead to a new year, most Americans are probably hoping 2022 will have very little in common with 2021. Spending almost two years under the suffocating weight of a global pandemic makes that understandable. Yet, as far as investors are concerned, most would gladly take more of the same.

The US stock market wrapped up 2021 on a familiar path… Trending higher. The S&P 500 and Dow Jones Industrial Average both finished the year within 1% of their all-time highs thanks to December returns above 4% and 5%, respectively. The vast majority of those gains came in the final 11 days of the year. The NASDAQ gained less than 1% last month and ended 3.5% below its highwater mark.

Ten of the 11 sectors in the S&P 500 delivered positive performance in December. Consumer Staples (+10%), Real Estate (+9.7%), and Utilities (+9.4%) led the pack. Only Consumer Discretionary (-0.3%) finished in the red.

On its way to a 27% calendar year return in 2021, the S&P 500 closed at a new all-time high an astonishing 70 different times. That’s the second most ever. Only 1995 had more (77).

While the momentum remained positive for the vast majority of the year, equities began December with a bit more uncertainty. Stocks had been negative in two of the previous three months (September, November) and investors were still making sense of a steep Omicron-induced selloff.

Equities moved higher in the first week of December before facing some mid-month volatility. Some of that may have been rekindled COVID concerns, but more was due to the latest developments from the Federal Reserve.

On December 15, the Fed released a statement announcing its intention to quicken the pace of its tapering. That is to say, reducing economic stimulus twice as fast as Fed Chair Jerome Powell originally suggested. The accelerated schedule puts the Fed on pace to eliminate bond buying and begin hiking interest rates in the second quarter of 2022.

The S&P 500 sold off 4% in the three days after that news, but it was all positive from there. Stock prices surged significantly from December 21 through year-end. In hindsight, it looks like a somewhat predictable Santa Claus rally. Some years, perhaps all you need to do is believe.

As good as 2021 was for equities, it was an ugly year for bonds. The Bloomberg Barclays Aggregate Bond Index lost 1.7% for the year. In its 46-year history, the index has only registered a negative calendar year return three other times, most recently in 2013. 10-year US Treasury yields, specifically, ended the year at 1.51% (up from 1.44% a month earlier). Treasury yields started the year at 0.92%. Rising interest rates, as most investors know, have a negative impact on the performance of bonds.

Inflation, obviously, is what’s causing interest rates to increase even though the Federal Reserve has delayed any official change to its benchmark Fed Funds rate. The latest Consumer Price Index (CPI) data showed annual inflation of 6.8%, the highest reading of 2021 (and the highest in nearly 40 years).

 Gasoline prices alone have spiked 58% in the last 12 months. Wages have increased 4.8% over the same period, meaning the cost of living (after inflation) for an average American family is becoming more expensive. If that sounds worrisome be thankful at least you don’t live in Turkey, where a full blown financial crisis includes year-over-year inflation of 36%!

International equities lagged US stocks for the year. Some of that is due to China, where slowing growth and a rash of regulatory crackdowns have hindered the world’s second largest economy. Part of the underperformance is also due to the US dollar strengthening roughly 7% last year versus global currencies.

Non-US Developed equities gained 4.4% in December and 15% for the year. Emerging Markets grew 1.5% in December, but still lost roughly 2% in 2021.

Gold prices increased 3.3% in December.

Here’s to a prosperous year for you and your portfolio in 2022.

October Market Recap

November 1, 2021

October has a reputation for being an especially bad month for stocks. The market’s crash in October 1929 helped spur the Great Depression. Black Monday in October 1987 remains the single-worst day in the history of the Dow Jones Industrial Average (-22.6%). Even last year proved to be relatively ugly. October 2020 brought the Dow’s largest monthly loss (-4.6%) of this latest bull market.

That history makes it especially notable that this year, October brought one of the strongest months in the last decade. The S&P 500 gained 6.9% last month. Only five times in the last 10 years have we seen a better month for US stocks.

All 11 sectors in the S&P 500 were positive. Consumer Discretionary (+10.9%) and Energy (+10.2%) recorded the most significant increases. Communication Services (+2.6%) and Consumer Staples (+3.7%) booked the most modest gains.

We’ve been reminding clients for much of the year that corporate earnings would face a higher bar late in 2021 once year-over-year growth was no longer being measured against pandemic-era figures. We have now reached that point, and yet earnings continue to exceed consensus expectations, even though the pace of growth has slowed.

Midway through third-quarter earnings season, 82% of reporting companies have beaten profit projections. Cumulatively, S&P 500 companies are on pace to grow by 37% from a year earlier. While the jukebox volume might be slightly lower, the hits keep right on playing.

Stocks responded by climbing to record levels. All three major US equity indices finished October at or near all-time highs.

A disappointing GDP report from the Bureau of Economic Analysis hardly dampened the enthusiasm. Initial numbers suggest the U.S. economy grew at an annualized rate of 2% in the third quarter, down from 6.7% annualized in Q2 and the slowest such increase of the post-pandemic recovery.

Recent economic growth was stronger in Europe. The 19-nation eurozone (those countries using the euro as their currency) grew at an annualized rate of 9.1% in the third quarter, boosted by the lifting of COVID-19 restrictions that have remained generally more rigid than in the US.

Headlines out of Washington point toward the eventual government infrastructure deal having a smaller scope and lower pricetag than originally thought. As politicians haggle over how to pay for the spending, proposed increases to personal tax rates, corporate tax rates, and capital gains rates have all been met with strong resistance. Major changes appear unlikely.

10-year Treasury yields climbed to 1.7% on October 22, a six-month high, before retreating to 1.56% at month’s end. Rising yields are an acknowledgment of higher inflation, which remains stubbornly elevated despite insistence by some that higher prices are merely “transitory.” The latest Consumer Price Index (CPI) data showed annual inflation of 5.4%, the fifth month in a row with a reading of 5% or more.

The Federal Reserve keeps inching toward a tapering of its stimulus (meaning “less bond buying”) by year-end, although no significant changes occurred in October. Fed Chair Jerome Powell and Co. are expected to announce more details in the coming days.

Oil prices rose steadily in October, moving higher for 10 weeks in a row to their highest level since 2014 before finally booking a weekly decline late in the month. West Texas Intermediate Crude finished October at $83.57 per barrel (compared to $37 per barrel a year ago). The average price of gasoline in America is now $3.40 per gallon, meaning it costs just under $60 to fill up the tank in an average sized vehicle.

Small-cap stocks underperformed in October. The Russell 2000 gained 4.2% last month and remains below its mid-March peak. International equities also lagged, relatively speaking. Non-US Developed Markets increased 3.2% in October. Emerging Markets returned just 1.1%.

August Market Recap

September 1, 2021

The S&P 500 did not finish the month of August at an all-time high. Based on the way US equities have traded this summer, that statement is actually newsworthy.

Stocks are lingering just below their high-water mark, and the market’s pace of gains remained on cruise control last month. As Labor Day approaches, the S&P has now risen for seven months in a row. It’s the longest such streak since a 10-month run ending in December 2017. Through the first eight months of 2021, the S&P has closed at a new all-time high on 53 different occasions.

Ten of the 11 equity sectors finished higher in August, led by Financials (+5.0%) and Communication Services (+5.0%). Energy (-2.9%) was the only sector to post a monthly loss.

August 16 brought another milestone for this bull market. On that date, the S&P 500 officially doubled off its pandemic low (March 2020). It took less than 17 months, in other words, for stocks to rise 100%. That is the fastest the S&P has doubled since World War II. Major selloffs have been few and far between. The S&P has not fallen as much as 5% even once in 2021.

The US housing market is on an incredibly strong run of its own. The latest Case-Shiller data shows that every major metropolitan area in the country experienced double-digit increases in home prices over the last 12 months. West coast cities Phoenix (+29%), San Diego (+27%), Seattle (+25%), and San Francisco (+22%) saw the largest gains. Nineteen of America’s 20 largest cities show home prices at all-time highs (Chicago being the lone exception).

The Federal Reserve’s annual economic gathering in Jackson Hole, Wyoming, took place in late August. Previously referred to as a “summit,” the event seems to have been rebranded as a “symposium.” As far as changes announced by the Fed, that was arguably the most significant. From a policy perspective, Chairman Jerome Powell (again) confirmed the Fed is NOT ready to reduce its asset purchasing and NOT ready to increase interest rates.

That familiar stance, however, caused a more noticeable market reaction than in previous months. The Dow closed 243 points higher on the day of Powell’s speech, which demonstrates equity markets had already been pricing in expectations of Fed tapering. Powell did indicate a reduction in the Fed’s bond buying is likely to occur before year-end. Markets still suggest no rate hikes are likely until 2023.

Small-cap stocks climbed higher in the final week of August, though monthly gains for the Russell 2000 (+2.1%) were mostly in line with larger-cap benchmarks. The Russell remains slightly below its record high set in March.

The trend of higher inflation continued last month. The Fed’s preferred inflation metric, the “personal consumption expenditure price index,” rose 0.4% from a month earlier. The PCE index’s 4.2% year-over-year increase shows the most significant inflation since 1991.

Despite the steady gains in stock prices, consumer confidence fell sharply in August to its lowest level since February. Concerns about increased cases of the Delta COVID variant and the reality of higher inflation seem to be the primary culprits.

Oil prices surged 10% in the last full week of August trading. West Texas Intermediate Crude finished the month at $68.50 per barrel. That’s 7.4% lower than a month earlier, a decline that contributed to the underperformance of energy stocks. On the bright side, a new government report showed domestic demand for oil climbed to its highest level since the start of the pandemic.

The 10-year US Treasury Bond yielded 1.3% as of August 31, up slightly from its 1.24% yield at the end of July.

The latest employment report from payroll services company ADP indicated fewer jobs than expected were created in August, but there seems to be plenty of work for those who are still looking. As of mid-August, there were more than 10 million job openings nationwide. That’s more than the total of unemployed working-age Americans. The government’s August jobs report will be released on September 3.

June Market Recap

July 1, 2021

Tech stocks are back!

You may not have noticed with the major stock benchmarks climbing steadily higher, but Technology had significantly underperformed through the first five months of the year. As of May 31, Tech’s year-to-date return ranked ninth out of 11 equity sectors in the S&P 500. That all changed in June.

Technology gained 6.9% last month and in doing so dragged the S&P to another positive monthly return. It’s now seven of the last eight months in which the benchmark index has risen higher. The NASDAQ surged 5.5% in June. The Dow was essentially flat.

Tech’s resurgence bucked one of the major financial trends of 2021; the rotation away from popular “stay at home stocks” (Tech was the best performing sector in 2020) toward more cyclical companies positioned to benefit more in a broad-based economic recovery.

Another trend – the steady increase in oil prices – remained very much intact and helped Energy (+4.5%) post the second-best sector performance in June. Crude oil prices have risen for five weeks in a row and have more than doubled since late October.

Five equity sectors were down last month with Materials (-5.5%) and Financials (-3.1%) struggling most.

There’s something to be said for positive momentum. As has been the case for most of the year, it was more escalator than roller coaster for stock investors last month and that remains the case entering July as the S&P 500 finished June on a 5-day winning streak (five consecutive “up days”).

With the path of least resistance clearly leading stocks higher, focus has intensified on the potential disruptors that could stunt the rally. Most agree that inflation and less favorable Fed policy are the two most likely suspects.

The latest batch of inflation data released on June 10 was again hotter than consensus estimates. The Bureau of Labor Statistics’ consumer price index accelerated 5% compared to a year earlier. The previous monthly reading clocked in at 4.2%. Those like Federal Reserve Chairman Jerome Powell who have preached that inflation will be “transitory” may ultimately prove correct, but the pressure to act is still increasing for now.

Hyper-focus on the Fed caused the most noticeable selloff in stocks last month. The Dow fell 3.5% the week ending June 18, when Powell said the central bank was considering tapering its $120 billion per month of bond purchases. Every word tends to get scrutinized when it comes to “Fedspeak,” but it should be noted that no specific timetable was given as to when such tapering could occur.

Markets suggest any increases to the Fed Funds rate remain at least 18 months away (in 2023) and Powell’s track record makes it clear that not disrupting markets is a top priority. With that in mind, investors’ main takeaway should be that no significant policy changes are imminent. When the Fed does eventually get less dovish, any adjustments will more than likely be implemented at a snail’s pace.

The US dollar also spiked in the wake of Powell’s comments, while gold prices fell. Overall, gold decreased 7% in June. Bonds yields generally have been on a slow but steady decline since late March. Treasury yields finished June at 1.44% (down from 1.58% a month ago).

International stocks lagged a bit in June. Emerging Markets gained 1% but Non-US Developed equities fell 1.1%. Small-caps, meanwhile, had another solid month. The Russell 2000 increased 1.8% in June. Its 17% gain year-to-date is better than the S&P 500, Dow, and NASDAQ.

For those tuned in to political drama, it’s been a relatively sleepy summer in Washington thus far. President Biden did announce agreement with a bipartisan group of Senators related to $1 trillion of infrastructure spending, but the plan has yet to be approved by Congress and the water remains muddy for now as to what the final legislation will look like.

April Market Recap

May 3, 2021

The buy-the-dip mentality that has become ever more popular among investors in these bullish of times is getting more difficult. The dips have disappeared.

Out of 21 trading days in April, the S&P 500 rose 12 times. Of the nine “down days,” none approached as much as a 1% drop and only three recorded losses of at least 0.5%. Only once did the S&P fall on consecutive days (April 19-20).

It all added up to gains north of 5%, while the NASDAQ finished with similar monthly returns (for a change). The Dow Jones Industrial Average rose about half as much. All the major US stock indices hit record highs in April before trading mostly sideways in the final two weeks.

Consumer Discretionary stocks booked the largest gains of any S&P sector, rising 8.8%. Communication Services (+7.9%) and Real Estate (+7.1%) also posted large increases. Energy (-1.3%) was the only sector to finish lower, but remains the best-performing sector year-to-date. Consumer Staples (+0.4%) also lagged.

Corporate earnings are back in the spotlight and the results so far have lived up to the considerable hype. As of month-end, roughly 60% of S&P 500 companies had reported first-quarter results and nearly 90% of those beat consensus earnings estimates. Cumulatively, earnings have grown 46% compared to a year ago when the same companies were reporting in the midst of a global economic shutdown.

Strong earnings, a strong US consumer, and the tsunami of liquidity unleashed by the Federal Reserve continue to stoke inflationary pressures. As measured by the Consumer Price Index, the pace of inflation has reached its highest level in 2 ½ years, showing a year-over-year increase of 2.6%.

Inflation is especially evident in commodity prices. Crude oil rose 7.5% in April. Copper, steel, and natural gas all gained more than 10% last month. Lumber prices are at all-time highs with futures contracts trading roughly four times above their typical price at this time of year. On the Chicago Mercantile Exchange, lumber prices have risen by the daily maximum allowed in nine of the last 17 trading days.

Jerome Powell and the Fed, however, have shown no signs of adjusting dovish monetary policy. In late April, Powell struck a familiar tone in referring to inflation as temporary and reiterating the Fed’s current pace of asset purchasing is appropriate.

It’s no surprise the Fed remains exceptionally accommodative, but it also begs the question, “If central banks don’t raise interest rates or taper liquidity in times of economic strength, when will they?”

American GDP rose at a seasonally adjusted rate of 6.4% in the first quarter. Weekly unemployment claims have fallen to their lowest levels since the pandemic took hold in early 2020.

The only news that seemed to upset markets in April were reports that the Biden administration could double capital gains rates paid by Americans with taxable income over $1 million. That triggered an intraday selloff in equities that proved temporary. Even if such a change were to be implemented, it would not represent a major hurdle for market momentum, in our view.

Small-cap stocks, as measured by the Russell 2000 index, slowed their roll a bit, gaining “only” 2.1% in April. The index has gained nearly 15% through the first four months of 2021.

International equities also lagged last month. The MSCI EAFE index of Non-US Developed economies rose 3%. Emerging Markets increased 1.2%, though it’s notable that China reported first-quarter GDP growth of 18.3% from a year earlier.

US 10-year Treasury yields finished at 1.63% (compared to 1.75% a month earlier). Gold prices increased 3.6%.

The battle to vaccinate the country against COVID-19 hit a speed bump in April when the US Food and Drug Administration temporarily halted the use of Johnson & Johnson’s single-dose vaccine. The pause was lifted weeks later after it was determined rare cases of blood clots posed no serious threat to the public.