Wasn’t 2021 supposed to be a return to normalcy? Americans voted out a president viewed as a capricious outsider and elected the consummate predictable insider, a seemingly safe bet who was tasked with rolling out a national vaccination program and putting the COVID nightmare behind us. But “returning to normal” didn’t quite work out the way everyone planned.
Here are some of 2021’s highlights, and lowlights:
The global economy rebounded even better than imagined thanks in large part to a combination of vaccinations and government spending. At the outset of 2021, the Organization for Economic Cooperation and Development (OECD) projected 2021 global growth at 4.2 per cent after a 4.2 per cent pullback in 2020. But it turns out the OECD was overly pessimistic on both fronts: the global economy declined by “only” 3.4 per cent in 2020, and in 2021 it will expand by 5.6 per cent, with the US economy growing by 5.6 per cent as well. Global central banks showered their economies with fiscal stimulus during the year. Germany and France focused on job retention, while the US and Canada prioritized the unemployed. The average unemployment rate in the developed world dipped to 5.7 per cent, as inflation-adjusted aggregate household income pierced pre-COVID levels. Stronger-than-expected growth pushed benchmark yields higher worldwide, and sent the 10-year Treasury yield from less than 1 per cent at the dawn of 2021 toward 1.6 per cent as the year ended. The Bloomberg US Aggregate Bond Index retreated more than 1.5 per cent for the year, one of its worst annual showings in over 20 years.
Equity markets surged. The S&P 500 capped a third consecutive year of double-digit gains by advancing over 28 per cent, thanks to a favorable combination of easy money and earnings growth. Central banks kept the liquidity spigot open and maintained near-zero interest rates throughout the developed world. Here at home, risk-taking was rewarded as many of last year’s strongest gainers were unprofitable companies. Robinhood favorites AMC Entertainment surged 1183 per cent and GameStop expanded 687 per cent. But overall corporate profit growth was astounding, handily beating street forecasts. The consensus at the start of the year was for an impressive 22 per cet profit gain among S&P 500 companies; although 4Q results have not yet been announced, full year 2021 is likely shaping up to deliver a 45 per cent earnings expansion. Analysts anticipate a 9 per cent gain in S&P 500 profits for 2022. The Index is currently trading about 20x that figure.
While 2020 was a stock pickers’ market, as the pandemic and lockdowns created clear winners and losers, 2021 was a risk takers’ market. According to Morningstar, as recently as November 85 per cent of active US stock funds trailed the S&P 500 for the year. On a capitalization-weighted basis, the results are even worse. Of the 50 largest actively managed US large-cap mutual funds, representing $1.7 trillion in assets, only two – Vanguard Windsor and Six Circles Unconstrained Equity – managed to edge ahead of the S&P last year. That means 96 per cent of our nation’s largest actively managed large-cap funds failed to beat their benchmark.
Chinese markets delivered surprisingly sour 2021 results. A regulatory crackdown, under the auspices of President Xi’s “common prosperity” program, left Chinese tech company executives and their investors off balance for most of the year. The MSCI China Tech 100 Index plunged 30 per cent last year, while US tech counterparts gained a nearly equal amount. The value of e-commerce giant Alibaba was nearly cut in half. Evergrande, the huge property developer emblematic of China’s heavily leveraged real estate sector, defaulted as a result of regulatory pressure from Beijing. We expect sorting out China’s real estate bubble will drag down Chinese economic growth and create a growth headwind for the Asian region.
Companies around the globe raised a record $12.1 trillion in 2021, facilitated by a flood of central bank liquidity as well as investors’ willingness to extend credit. US companies raised more than $5 trillion in 2021 via stock issuance, bonds and other borrowing. This global accumulation of capital represents a 17 per cent increase over the level of capital raised in 2020, which was itself a record year. Easy financial conditions are fueling a capital expenditure (CAPEX) boom in the United States. US companies spent big on technology to facilitate a remote environment. We expect the rising CAPEX trend to continue, as employers turn to technology to address the scarcity of workers and rising labor costs.
Special purpose acquisition companies (SPACs) took in a record $160 billion in 2021, representing more capital than they raised in total over the previous decade. For the first time ever, more money was raised through SPAC issuance in the US than through traditional IPOs, according to the Financial Times. But perhaps capital raising has gotten too easy: according to The Wall Street Journal, more than two-thirds of companies going public last year through SPACs and traditional IPOs were unprofitable, a phenomenon not seen since the tech bubble. Currently more than 550 SPACs are seeking a target, according to Dealogic, and nearly 200 of them face a year-end 2022 deadline.
Extensive shortages driven by kinks in the global supply chain took both producers and consumers by surprise. Factory shutdowns and port disruptions in China and other Asian production hubs, combined with massive spending on physical goods, conspired to push major appliance prices more than 15 per cent higher for the 12 months ended June 2021. Inflation, meanwhile, reached a level not seen since the 1980s. As of November, headline CPI hit 6.9 per cent, in stark contrast to economists’ earlier expectations for inflation ranging between 1.3-4.3 per cent for the year.
The 2021 American economy was remarkable – jobs were plentiful, growth was strong and the stock market surged. Unfortunately, these numbers don’t tell the entire story. Despite favorable data, the University of Michigan’s Index of Consumer Sentiment plunged to a level not seen since 2008, the year of the financial crisis. COVID was expected to be in the rear-view mirror by now, with children back in school, parents back at their jobs and families enjoying movies, dinners and vacations during their time off. Instead, Omicron is encircling the globe. But 2021 was a better year than 2020, and we expect 2022 to be better still. We will maintain our close watch on issues affecting your investments in the coming year. Wishing you a Happy, Healthy and Prosperous 2022!