2021 could be described as a year of substantial change. A new president took office, a $1.9T Covid-19 relief package was passed in March, vaccinations became widely available, and stock markets saw largely positive returns as the U.S. economy continued to recover. The Omicron variant’s arrival late in the year and irritatingly high U.S. inflation figures have both caused investors to modestly reassess growth projections for 2022, but a general feeling of optimism is still widespread. The U.S. appears to be on the road to recovery.

Labor markets have been mixed but improving. Monthly payroll figures reported by the Labor Department are still trending favorably, albeit with some volatility from month to month. The closely-watched ADP Research industry report for December shows that 2021 closed with positive service sector job gains and healthy job growth in large, medium, and small businesses.

Investors remain optimistic as we enter 2022. The S&P 500, a broad index of large cap stocks, closed at record highs more than 65 times in 2021, or almost a third of all trading days in the year. Healthy corporate earnings growth could be a factor in this strong rally. Research service Factset estimates that fourth quarter 2021 S&P 500 earnings growth could exceed 20 percent compared to last year. Stock valuations do remain elevated compared to historical levels; however, investors are currently paying in excess of 20x the estimated S&P 500 earnings for 2022, compared to a 10-year average of just ~16x.

Non-U.S. stock performance varied. Economies with higher levels of political stability and industrialization fared well. These developed markets posted positive stock performance of over 8 percent in 2021, bolstered by the re-opening of economic activity and coordinated government responses to the Covid-19 pandemic. In contrast, emerging market economies posted negative returns for the year. China is considered an emerging market. Several factors weighed on China’s performance including the country’s recently aggressive anti-trust and anti-monopoly enforcement, concerns about the country’s large real estate market, and slowing consumer behavior due to travel restrictions from the virus spread.

2021 was a challenging year for bond markets. Bond yields remain low by historical standards. In late November the U.S. Federal Reserve prepared investors for multiple interest rate increases in 2022. This action raises the prospect of higher bond yields; however, elevated inflation figures chip away at this benefit. Bonds still serve a valuable role in portfolio construction as both dampeners of volatility and diversifiers of risk.

Looking Ahead

2022 has shown welcome signs of improvement. The U.S. unemployment rate is now 3.9 percent, which is the lowest since early 2020. Initial claims for unemployment insurance are similarly trending near pre-pandemic levels. The Federal Reserve’s willingness to reduce its $120B/month bond purchases sets the stage for interest rate increases in the coming months. The Fed’s “dot plot” chart indicates that three rate hikes in 2022 are the present expectation. These interest rate increases could help combat inflation but also signal that Fed officials believe the US economy is healthy enough to endure a less accommodative rate environment. Consensus U.S. GDP estimates for 2022 are ~4%. This healthy figure is a welcome change from the sharp GDP contraction of 2020, and the uncertain start to 2021.

Outside the U.S., the duration of the recent Emerging Market slowdown remains to be seen. Investors will be closely watching this trend in the coming months.

What Does This Mean For You?

At Domani, part of our commitment to our clients is to pay careful attention to each client’s portfolio and financial goals, and as we see changes in the market environment, we continue to revisit allocations, review cash needs, and communicate accordingly. We are always here to have a conversation, answer a concern, or adjust plans to best suit each client. If you’d like to start a conversation, ask us a question, or gain some insights, please call us anytime. You can also visit our team page to learn more about our staff, or connect with us by emailing [email protected].