Equity markets rose this week after little was released in the way of economic news. Markets finished the year on an incredible high note, as the S&P 500 finished up 28.71% in 2021. Treasury rates jumped as well, with 10 year notes finishing up over 65% from the prior year. Looking forward into 2022, many of the problems from 2021 remain, including supply chain strains, the pandemic, and inflation. While these problems are not insignificant, they are being addressed by the private sector, government, and the Fed, and will likely not be long term problems. In spite of the challenges that have plagued the economy for almost two years, equities have persevered and flourished, recording excellent profitability and proving their adaptability. Hopefully, wounds from pandemic lockdowns continue to heal, and markets advance even higher in 2022.
Overseas, developed markets underperformed emerging markets, with both indices returning positive performance. European indices were positive, while Japanese markets also returned positive performance. Improving prospects against the pandemic as well as improved prospects for economic recovery should continue to help lift markets globally over time, but macroeconomic factors such as inflation and supply shortages threaten markets everywhere.
Equity markets were positive this week as investors continue to assess the state of the global economy. While fears concerning global stability and health overall appear to be in decline overall, the recent volatility serves as a great reminder of why it is so important to remain committed to a long-term plan and maintain a well-diversified portfolio. When stocks struggle to gain traction, other asset classes such as gold, REITs, and US Treasury bonds can prove to be more stable. Flashy news headlines can make it tempting to make knee-jerk decisions, but sticking to a strategy and maintaining a portfolio consistent with your goals and risk tolerance can lead to smoother returns and a better probability for long-term success.
Chart of the Week
European countries were given some much needed relief as natural gas prices plunged to end 2021. Mild weather as well as shipments from the United States and more than expected deliveries from Russian pipelines helped precipitate the drop.
Broad market equity indices finished the week up with major large cap indices outperforming small cap. Economic data has been mostly encouraging, but the global recovery still has a long way to go to recover from COVID-19 lockdowns.
S&P sectors were mostly positive this week. Real estate and utilities outperformed, returning 3.69% and 2.64% respectively. Consumer discretionary and communications underperformed, posting 0.42% and -0.79% respectively. Energy won the 2021 race with a 47.74% return.
Oil rose this week as crude oil inventories shrunk. Energy markets have been highly volatile in the COVID era, but it appears that higher oil prices may be more of the norm given recent market fundamentals. Demand is still down compared to early 2020, but as global economies are continuing to improve, oil consumption is recovering rapidly. On the supply side, operating oil rigs are still well under early 2020 numbers, but trending upwards. In addition to supply and demand, a volatile dollar is likely to have a large impact on commodity prices.
Gold rose this week as the U.S. dollar weakened. Gold is a common “safe haven” asset, typically rising during times of market stress. Focus for gold has shifted again to include not just global macroeconomics surrounding COVID-19 damage and recovery efforts, but also inflation and its possible impact on U.S. dollar value.
Yields on 10-year Treasuries rose this week from 1.4927 to 1.5101 while traditional bond indices rose. Treasury yield movements reflect general risk outlook, and tend to track overall investor sentiment. Expected increases in future inflation risk have helped elevate yields since pandemic era lows in rates. Treasury yields will continue to be a focus as analysts watch for signs of changing market conditions.
High-yield bonds rose this week as spreads tightened slightly. High-yield bonds are likely to have stabilized for the short term as the Fed has adopted a remarkably accommodative monetary stance and major economic risk factors subside, likely helping stabilize volatility.
A headwind could be on the horizon for fixed income assets, as the Fed has begun tapering its asset purchases which could raise yields. Tapering will undoubtedly have an impact on yields, but the degree of impact is uncertain. In addition to asset tapering, the Fed is currently projecting it will be raising interest rates three times in 2022, adding additional interest rate risk to fixed income assets.
Lesson to be Learned
The stock market is filled with individuals who know the price of everything, but the value of nothing.”
Brookstone has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).
In a nutshell, we want the RPI to be low on a scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read at least 66.67% bullish. When those two things occur, our research shows market performance is typically stronger, with less volatility.
The Recession Probability Index (RPI) has a current reading of 27.58, forecasting a lower potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 100% bullish, meaning the indicator shows there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. It is because of the allure of these distractions that having a plan and remaining disciplined is mission critical for long term success. Focusing on the long-run can help minimize the negative impact emotions can have on your portfolio and increase your chances for success over time.
The Week Ahead
This week will see updates to services and manufacturing PMI numbers as well the most recent hiring figures and unemployment rates.
More to come soon. Stay tuned.