2021 Market Recap and 2022 Outlook

Many have joked that 2022 feels like Groundhog Day, or a repeat of 2020.  The silver lining is we get to cycle through a comfy selection of sweatpants while staying at home to limit unnecessary COVID exposure.

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Many have joked that 2022 feels like Groundhog Day, or a repeat of 2020.  The silver lining is we get to cycle through a comfy selection of sweatpants while staying at home to limit unnecessary COVID exposure. In seriousness, the COVID pandemic wreaked havoc in the spring of 2020. In 2021, just as we thought we were getting back to “normal” we dealt with two major COVID variants that disrupted our daily lives again: Delta & Omicron. Interestingly, the stock market also has cycled in a Groundhog Day fashion, but fared well by the close of 2021.

Nearly every U.S. investment asset class had strong positive gains in 2020 and 2021. The Wilshire 5000 Total Market Index, the broadest measure of U.S. stocks, gained 27% in 2021 and 21% in 2020. The widely publicized S&P 500 Index, the 500 largest U.S. companies, had a gain of nearly 27% in 2021. Meanwhile, the Russell 2000 Small-Cap Index had a 15% gain,[i] and the tech-heavy Nasdaq Composite Index had a 21% return in 2021.[ii]

International investments did not fare as well in 2021. The EAFE Index, which is comprised of developed foreign economies of Europe, Australasia and the Far East, gained 8% in 2021. EAFE EM, or the emerging market stocks of less developed countries, lost about 5% in 2021.[iii]

Other investment categories, which typically make up a smaller allocation in a diversified portfolio due to their volatility, posted impressive gains in 2021. The Wilshire U.S. REIT Index which measures real estate finished a strong recovery year with 46% gains, offsetting an 8% loss in 2020. Commodities, as measured by the S&P GSCI Index, had a 40% gain in 2021.[iv]

Moving over to the bond market, the yield on the 10-year Treasury bonds rose from 0.95% in 2020 to 1.51% at the close of 2021. Even 30-year government bonds are yielding just 1.88%.[v] The extraordinarily low bond yields are a reflection of the efforts by the U.S. government to support the economy during COVID through their massive bond buying program.

We are in an unprecedented stock market run. If we were to use the S&P 500 as a benchmark, the market has doubled itself since the start of 2018 with three back-to-back years of enormous returns, unmatched in history: 29% in 2019, 16% in 2020 & 27% in 2021.[vi] Given returns in the bond market are so low, many traditionally conservative investors have ventured into the stock market in search of returns to keep up with our high inflation.[vii] However, stocks are priced quite high and many are concerned about the warning signs ahead.

In December 2021, inflation, as measured by the Consumer Price Index (CPI) reached 6.9%. We have not seen levels this high since the 1980s. In the ‘80s we had stagflation, or high inflation in combination with high unemployment and low economic growth. We appear to not be in risk of such a recession-inflation. As of November 2021, unemployment dropped to 4.2%, down from the highs of 14% during the peak of COVID.[viii]  Further, the U.S. GDP, the broadest measure of economic activity, was at $19.5T as of Q3, 2021, exceeding pre-pandemic GDP levels.[ix]

Another forward looking concern relates to the Federal Reserve’s monetary policy, specifically related to their tapering of bond buying as the U.S. economy recovers from COVID. As noted earlier, to support the economy, during COVID, the Fed bought bonds as a policy tool to lower long-term interest rates and to increase money supply in the economy. As the fed tapers or reduces their bond buying program, it is possible regular investors will demand higher bond yields once they are no longer competing against the Federal Reserve. Naturally bond yields are meant to exceed inflation (currently at 6.8%) and add a little extra so the investor is rewarded for their investment from an adjusted real return perspective. If, per se, inflation were to remain high and bond yields were to reach 7-8%, we might see droves of investors abandon high priced stocks for a decently priced return in lower risk government bonds. In turn, that could compress the balance sheets of American corporations as their stock prices fall. This would also hurt the U.S. economy if the government went from paying the current 1.5% on debt to say 7% on debt. The true equilibrium of supply and demand on the bond market will likely be less dramatic, but for argument’s sake, the tapering of bonds could have far reaching effects if it is not executed cautiously.

Meanwhile, President Biden’s Build Back Better is being reconstructed for hopeful passage in 2022. The SEC is still deliberating regulation around the cryptocurrency market, and there are more than 700 cryptocurrencies in circulation currently. Supply chain management issues continue to persist and the job market is recreating the rules of how and where we work.

There are signs to support both a contractionary and growth environment in 2022.  We are grateful for the past three years of stock market growth. Although the future is unknown, history has shown that the stock market is resilient and recovers from downturns to reach new highs. The stock market will certainly have pull-backs, but those are healthy ways of eliminating micro-bubbles in the market that would otherwise create longer term problems. A sound and steady long-term investment strategy has proven to be a winning strategy for investors to capture market rates of returns and weather short-term volatility, time and time again. The new year may be a good opportunity to review your investment strategy with your Certified Financial Planner™ to ensure you’re on the right path for the market ahead.


[i] Russell index data: http://www.ftse.com/products/indices/russell-us 

[ii] http://www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

[iii] https://www.msci.com/end-of-day-data-search

[iv] https://www.spglobal.com/spdji/en/index-family/commodities/broad/#overview

[v] http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

[vi] S&P index data: https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

[vii] US Bureau of Labor Statistics via FRED as of 12/10/2021

[viii] US Bureau of Labor Statistics via FRED as of 12/3/2021

[ix] US Bureau of Labor Statistics via FRED as of 12/22/2021

The commentary on this website reflects the personal opinions, viewpoints and analyses of Kondo Wealth Advisors, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc. or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.