US Annual (2021) Recap: Dow +18.73%, S&P +26.89%, Nasdaq +21.39%, Russell +13.70%
US equities were higher in 2021 with the S&P up for a third straight year. There were several big themes in focus. Covid vaccinations formed a key piece of the bullish narrative, particularly over the first several months of the year. The biggest tailwind may have come from the continued expansion of central bank balance sheets and related easy financial conditions. Fiscal stimulus was another widely discussed positive. Record earnings beats, driven by a better demand backdrop and resilient margins, also helped underpin risk sentiment. Some of the other bullish talking points revolved around deeply negative real yields and their influence on TINA and FOMO dynamics, robust consumer and corporate balance sheets, corporate buybacks, and a heightened retail impulse. There were a number of high-profile headwinds this year as well. These included the ongoing Covid pandemic, the emergence of new variants, supply chain constraints, more persistent inflation pressures, the Fed's policy pivot, and longstanding concerns about stretched valuations and crowded positioning. (FactSet)
Vaccinations, stimulus, TINA the big equity tailwinds:
While 2020 ended with just under 12M Covid-19 vaccine doses administered, the figure surged to nearly 9B in late 2021. The Fed's balance sheet stood at nearly $9T in late 2021, up from $4.4T before the pandemic. This put the balance sheet at ~40% of GDP, well above the 15% seen after the global financial crisis. Congress passed a ~$1.9T stimulus bill in March that featured $1,400 direct checks, putting the total fiscal policy response to the coronavirus crisis at nearly 25% of GDP vs the ~10% decline in the economy at the height of the pandemic. It later passed a ~$1.2T physical infrastructure package that featured more than $550B in new spending. According to FactSet, S&P 500 earnings are expected to increase 45.1% in 2021, meaningfully above the trailing 10-year average growth rate of 5.0% and marking the best performance since FactSet began tracking the metric in 2008. TINA and FOMO dynamics seemed to be underpinned by deeply negative real rates and best evidenced by the $1T+ of global equity inflows in 2021, which according to BofA, exceeded the combined $785B of inflows over the past 19 years. (FactSet)
Covid headwinds linger, inflation concerns ramp:
The lingering Covid pandemic remained a big headwind on economic normalization, particularly as new variants emerged. The Delta variant weighed on Q3 growth while the Omicron variant presented another stumbling block late in the year given its high rate of transmission and ability to evade the standard two-dose vaccine regimen. The combination of the pandemic and unprecedented monetary and fiscal stimulus wreaked havoc on global supply chains, a dynamic that pressured both sales and margins. Supply chain constraints also played into what turned out to be one of the biggest themes of the year in terms of the pronounced shift in the transitory vs persistent inflation debate. This shift, highlighted by a 6.2% y/y increase in headline inflation in November, the highest in over 30 years, was a big driver of the Fed's decision at its December meeting to accelerate/double the pace of its taper to $30B a month. In addition, the median projection in the December dot plot was for three rate hikes in 2022, up from half a hike in the September update, with another three rate hikes seen in 2023 and two in 2024. (FactSet)
Growth outperforms value, reopening names lag:
Growth was a big outperformer vs value despite the broader economic normalization trend. Big tech fared well despite the ramp in regulatory scrutiny with some continued focus on its leverage to structural growth and disruption themes. Reopening plays such as airlines, cruise lines and casual diners largely underperformed. However, retail outperformed as a group. Autos, particularly Ford and GM, along with the homebuilders, were some of the other standouts in consumer discretionary. The vaccine names saw outsized gains. Pandemic winners tended to lag, with Zoom and Pelton among the high-profile decliners. Meme stocks largely outperformed with names like GameStop and AMC posting triple-digit percentage gains, fitting with the broader retail impulse theme. Energy was the best performing sector with oil boosted by favorable demand and supply dynamics. Investments banks underpinned the financials. Global miners, precious metals, credit cards, growth software, HPC, and biotech lagged. (FactSet)
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