2021 Was Another Banner Year for U.S. Stock Investors

Driven by massive amounts of fiscal and monetary stimulus during the year, investors shrugged off most negative headlines, and when they paused on the most serious news of rapidly rising virus infections, it wasn’t for long. Corporate earnings broke records right along with the market. Estimated earnings growth for the calendar year is an extraordinary 45%, the highest since Factset began tracking the data in 2008.

Stock market breadth narrowed later in the year with a short list of primarily mega-cap tech companies accounting for a significant percentage of overall market return. This is part of the reason market volatility increased toward year end, relative to earlier in the year when returns were driven by a larger number of companies across a diverse group of industries. In the final return tally for the calendar year though, the broad-based S&P 500 bested even the technology-focused Nasdaq Composite return of 22%.

The Consumer Discretionary sector experienced a modest pullback in December, an otherwise positive period of returns for all other sectors of the S&P 500 Index. Despite banner calendar year results for the index being driven by mega-cap high growth companies, investors focused more attention on value stocks in the final month of the year. Defensive sectors such as Consumer Staples, Healthcare and Utilities were among the strongest.

The Federal Reserve has made no secret of their intention to raise short-term interest rates this year, which makes the bidding up of rate sensitive Utilities stocks and Real Estate Investment Trusts (REITs) in the final trading weeks a bit of a surprise. High dividend paying utility stocks normally receive accelerated competition from bond investments in a rising rate environment, and higher borrowing costs negatively impact profit margins. Stock investors seemed to shrug off these risks along with most others in the year end rally.

The yield on the 10-Year U.S. Treasury finished the year 0.58% higher than where it started, closing at 1.49%. This is the largest rise in the benchmark yield since 2013, weighing on bond prices. The Fed’s acceleration of the tapering of their long-standing bond purchasing program likely took some additional wind out of the sails of the bond market toward year end.

Skyrocketing home prices and a modest bounce back up of mortgage rates from the rock bottom lows reached earlier in the year did little to keep home sales on ice at the start of winter. The latest reading of Existing Home Sales (November) rose 6.46 million units on an annualized basis, on pace to post the strongest year since 2006. New Home Sales held up strongly as well despite year-on-year price increases of a whopping 19%. Spending an inordinate amount of time at home seems to have continued to fuel the home upgrade cycle.

Levels of year-over-year inflation increases not seen in decades remain on the minds of economists and investors. While the monthly data has shown signs of improvement, an incredibly tight labor market (with 10.5 million open and unfilled jobs as of the latest report through November) and ongoing supply disruptions continue to be canaries worth watching in the coal mine. Despite rising prices, consumers have continued to spend. Travelers weary of being tied down came back in full force during 2021. Many of whom took their ornery perspective on passenger safety guidelines and regulations with them, with a record number of unruly passenger incidents as shown in the chart below.

The Omicron variant of COVID-19 continues to cast a shadow of uncertainty on economic growth. Like it or not, investors are constantly faced with numerous uncertainties. It is the core tenet of balancing risk relative to reward in investing in volatile asset classes. The key risk on most investors’ minds looking forward is what potential Federal and local government policy responses may be enacted in response to rapidly rising cases of the most recent virus variant. The balance between the appropriate level of public safety relative to a potential return to business and school shutdowns is a tightrope walk with massive economic ramifications. Too much regulation could lead to a severe economic downturn like experienced in early 2020, too little and sick workers (as well as parents of sick children) could exacerbate labor shortages and supply chain delays. Policy makers are in an unenviable position of needing a Goldilocks-type response to balance risk relative to reward, much like the decisions investors wrestle with on a regular basis.

We at Plimoth Investment Advisors wish you and your families a healthy, safe, prosperous New Year. Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.