Market Pulse: 2021 Review, 2022 Preview
In 2021 there were scary headlines about the omicron virus variant, inflation, Fed policy and interest rates. Those didn’t spill over to the stock market, however. The S&P 500 hit a whopping 70 new highs on its way to a 27-percent return. There was only one five-percent pullback, which occurred in the third quarter. Stocks recovered from that loss and then some in the fourth quarter.
Now for a reality check: the S&P 500 made stocks look stronger than they were. Were it not for a handful of big-cap stocks, the S&P’s performance the past year would have been lackluster or at best average. Credit Alphabet, Microsoft, Apple, Tesla, Meta Platforms (Facebook) and Nvidia, which count for a quarter of the S&P 500’s movement.
Last year was the third straight year of double-digit gains for the broad index and the second in the midst of the Covid-19 pandemic. The major indexes had their best three-year performance since 1999. Most of us remember what happened after that … or would rather not.
I see inflation as the number one risk for the economy, standards of living, and the stock and bond markets. We are on the edge or maybe in the early stages of what is known as a wage-price spiral. Here is how it works: Workers see their food, energy and other costs rising, so they demand and get higher wages on top of more generous benefits. Employers see their labor costs rising so they raise prices. Ever rising prices across the economy cause workers to demand even more. Then the cycle repeats and a spiral ensues. Who wins? Not the workers whose real wages don’t keep pace and not employers whose rising labor costs can’t all be recovered from customers in a competitive economy. Both know it.
Rising inflation will force the Fed to raise interest rates, and while that would normally be a negative for stock valuations I only see it as a mild headwind in 2022. Why is that? Because rates will be rising from virtually zero to a level a year or two from now that would still be low and not an obstacle to growth. Yes, mortgage rates will be higher, consumer loans as well and the cost of capital. But life will go on.
This far into a market rally one should expect some profit-taking now and then, even a sell-off of ten percent or more. I don’t expect 2022’s returns to approach last year’s or even 2020’s. Trees don’t grow to the sky. But just as the S&P’s extraordinary performance last year does not reflect how most stocks did, that will likely be true again, only in reverse. Value stocks will have their day. Those stocks will do better.
— David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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