A Pretty Good Outcome
The broad equity market averages have produced a healthy double-digit year in 2021, nicely above long-term annual historical levels. This outcome also follows surprisingly good performance in 2020 despite the massive economic disruptions of that year.
It has been an interesting experience this year. As we coast through the final days of the final month of the year, we look back on prevalent worldwide concerns that existed when January 2021 opened up. Of course, there is a never-ending list of worries every year, but this year was unique because it followed 2020 - a year of extraordinary disruption. Residual dust from the prior year was still lingering as the current year began (and still remains), so it seems only natural that this year would include some elements that are unique, and indeed it did.
We note two phenomena in financial markets that made this year unique:
Number one was the sheer level of speculation that occurred as the year opened up. Crowd-based social media sites coupled with new trading platforms became an entertainment venue for millions of investment newbies. This is not the first time this type of frenzy has occurred - think back to the year 2000 when individuals quit their jobs to do day-trading.
And number two, there was a notable absence of corrections through the year - with only minor declines in September and November. Certainly not a typical year, and another confirmation of why prognosticators most often walk around with their tail between their legs.
However, here at year-end we note that the first of the two unique 2021 elements - early year trading in the media darlings, those "meme" or story stocks, and tools of excessive speculation, has deflated mightily as the year comes to a close. This gives us hope that some rationality may be returning. We should have some sympathy for 2021 speculators that forgot the outcome of the day trading phenomenon when it similarly occurred in the year 2000. If we could have a moment of silence...
Perhaps speculation will fire up again in the new year, who knows? But in the meantime, quality sectors have begun to percolate nicely and have become a newfound interest of investors. We are happy to note that this trend favors us since we focus on mundane, yet serious wealth-building and income-producing high quality securities.
We have a degree of certainty that interest rates will likely rise in 2022, and it is important to remember that interest cost is a weight on all asset classes - stocks, bonds, real estate and all others. Expect this to have a weighing effect on all these assets. We would also note that real estate and bonds are especially interest sensitive.
It also becomes less likely over time that markets move forward without some sort of correction (10% or more decline), so this becomes a stronger likelihood as we migrate into the new year. Mentally prepare for the next correction; they are a normal part of the investment process and are not worthy of extreme moves.
Finally, forecasting is most often an unproductive exercise, but we suspect that the trajectory of markets will slow markedly after the exceptional rallies of 2020 and 2021.