“The individual investor should act consistently as an investor and not as a speculator.”
Benjamin Graham – American Economist
The year 2021 was a wild one in many respects, but the U.S. stock market pushed higher and delivered a solid performance. The Standard & Poor’s 500-Stock index notched 70 all-time highs and gained 26.9%, which was the third-largest gain of the past 20 years. Investors brushed off news that might have derailed stocks in years past. The worst peak-to-trough drawdown in 2021 was just 5.2%, and the worst down day was a loss of just 2.6%.
January 2021 saw the inauguration of President Joe Biden, but not before protestors sieged the United States Capitol. Despite the initial tumult, the year began with hope that increased availability of COVID-19 vaccines would lead to the end of the pandemic. Unfortunately, the emergence of variants, coupled with uneven vaccine distribution, saw millions more people contract the virus.
In the United States, two additional rounds of stimulus payments in the first quarter helped to line consumers’ pocketbooks, which led to a rapid increase in demand for goods and services. Historically low lending rates and a rise in remote work increased the opportunity for consumers to spend. This brought a historic surge in consumer and producer prices, labor shortages, and global supply-chain bottlenecks.
U.S. inflation hit a nearly 39-year high in November with prices up 6.8% (Consumer Price Index) from a year before. The Federal Reserve initially termed the rapid rise in prices “transitory” but later acknowledged that factors contributing to inflationary pressures were more than “transitory” and agreed to begin tapering its monthly asset purchases ($80 billion Treasuries and $40 billion mortgage-backed securities) in December 2021. The Fed also projected that it would increase interest rates as many as three times in 2022.
Historically low mortgage rates helped propel the housing market, as both the number of residential sales and property values escalated. Energy prices, particularly gas prices, rose by nearly 50%, as crude oil reached more than $80 per barrel for the first time since 2014.
U.S. economic recovery was highlighted by job growth and dwindling unemployment claims. Employment gains averaged over 550,000 per month in 2021, while weekly jobless claims fell to a 52-year low in December. Corporate earnings were strong, despite labor and supply shortages plus lingering economic uncertainty caused by the pandemic.
2021 was a year rife with speculation. An influx of so-called “meme traders” used social media to drive up share prices of companies such as GameStop and AMC that hedge fund professionals were shorting and hoping the share prices would drop. Meanwhile, a rush of companies made the leap from privately held to publicly traded thanks to a flurry of deals via SPACs, or special purpose acquisition companies. Cryptocurrency also gained more mainstream acceptance and attention in 2021, with a market cap of all cryptocurrencies topping $3 trillion. Meanwhile, non-fungible tokens (NFTs) became the latest asset du jour. Despite what the economy or the markets do, our overall investment philosophy is to remain goal-focused and planning-driven, rather than adopting an approach that is market-focused and current-events driven. No one has a crystal ball, and consistently timing the market is not possible. That’s why we rarely recommend changing your portfolio so long as your long-term goals haven’t changed.