- Jan. 5, 2022
-- 2021 was a better-than-
average year on many fronts. Stock market returns, economic growth, policy stimulus and inflation all ran hot while volatility was historically cool. 2022 won't be a carbon copy, in our view, as progressing Fed policy settings and economic trends are consistent with mid-cycle conditions, a backdrop that will produce more moderate growth and market performance. Nevertheless, the past year's gains can be appreciated while also put into broader perspective. Here's a look at how 2021 stacked up.Stock Market Return
- 2021 was the sixth-best year for U.S. equities since 1990, becoming the ninth year during that time frame with a return above 25%1. The S&P 500 closed 70 days at record highs, not quite beating the record set in 1995 (77 days)1. 2021 was the best year of a three-year stretch of consecutive double-digit gains, raising the average annual return since 2019 to 26%1.
- Looking ahead: We think investors should prepare for positive, but more muted gains in the coming year. A slight contraction in the price-to-earnings multiple (valuation) from current elevated levels; positive but slower earnings growth, as profit margins recede from record highs amid rising labor and input costs; and a steady dividend yield support our outlook for an upper single-digit return for the S&P 500 in 2022.
Source: 1. Bloomberg
- Economic growth was the strongest since 1984, reflecting strong consumer demand along with healthy housing and labor markets, and the reopening climb out of 2020's pandemic-induced hole. Inflation, labor shortages and supply chain disruptions posed threats but were outweighed by an unemployment rate that fell toward 4%, strong wage growth and early-year stimulus checks.
- Looking ahead: On one hand, we think inflation will remain somewhat sticky in 2022, ushering slightly tighter Fed policy that poses a credible headwind to economic momentum. On the other hand, we think labor shortages and supply bottlenecks will begin to clear in the second half of the year, accompanied by an upswing in the business capital investment cycle. Against the backdrop of healthy household finances and strong demand, we think the economy is poised to grow at a 3%-plus clip next year – a foundation that is traditionally supportive of ongoing bull markets.