Year in Review

As investors look ahead to a new year, it’s important to reflect on 2021 and how the markets reacted to different macroeconomic pressures. 2021 was a year of:

  • COVID Variants
  • Fed Tapering (Slowing of Bond Purchases)
  • Rising Inflation
  • Supply Chain Issues – Shortages
  • Increased Market Volatility – Growth vs. Value

In addition, there was good news too:

  • Strong Economic Activity
  • Strong Corporate Profitability
  • Record Stock Market Highs

As the year progressed, we saw COVID restrictions ease and people returning to everyday activities like going out to eat, shopping, and traveling. The pandemic created a lot of pent-up demand, that once unleashed, sent ‘recovery’ stocks soaring, inflation higher, and the markets into a risk-on environment. The world had anticipated this to an extent, but when combined with a jobs market that was not yet fully recovered, this led to a variety of supply chain disruptions.

Risk-off assets, like bonds (black line) and gold (blue line), had a rough year as interest rates rose, despite the Fed trying to artificially keep rates low. (see chart below)1

The Fed started tapering its bond purchases in December and recently announced that it will double the pace of tapering heading into 2022. The Fed also announced they anticipate three rate hikes next year as real rates (rates minus inflation) remain negative amidst rising inflation.2 Rising rates hurt bond market returns and investors turned to high yield bonds and alternative assets to find yield. Gold had a rough year as investors started using cryptocurrency as an inflation hedge.

Risk-on assets, like oil (black line), real estate (blue line), and stocks (red line) had a great year in 2021 (see chart below)3.

As the economy and travel picked up, so did the world’s demand for oil. Oil reserves were lower from the pandemic and renewable energy efforts, but when economic activity picked up, oil shortages drove up prices. Additionally, as restrictions eased workers began buying homes as work from home adoption rose, leading to a housing shortage. 2021 quickly proved that global supply chains were caught short as demand surged.

All in all, stock markets had another strong year as investors embraced a risk-on mentality. Record stock market highs were driven by rising corporate earnings and a strong economy. Additionally, stocks experienced increased volatility as investors shifted between growth and value sectors of the market.

As we look ahead to 2022, Gradient Investments continues to view bonds unfavorably and stocks favorably. We recently raised growth allocations (via the G33) in our Tilt Series, and now have equal exposure to growth (G33) and value (G50) across all the Tilt Series models. We believe this barbell approach is favorable due to a strong consumer, normalizing supply chains, and rising interest rates.

Sources:

  1. https://stockcharts.com/h-perf/ui
  2. https://www.investopedia.com/fed-will-double-pace-of-tapering-5213346
  3. https://stockcharts.com/h-perf/ui