Major U.S. equity indexes enjoyed positive results in the final month of the trading year. As one indicator after another showed increasing inflation metrics during December, the S&P 500 continued to respond with fresh all-time highs. Broad, solid corporate earnings and a resilient consumer contributed to the S&P 500 finishing 2021 as the third consecutive year of double-digit percentage gains, even with uncertainties surrounding Omicron and inflation.
2021 Rewarded Long Term Investors
2021 featured spiking inflation, employment data zig-zags, higher interest rate anticipation, and proposed tax changes. All the while, the S&P 500 continued its upward trajectory during the year. We saw the emergence of meme stocks and other emotionally based investment trading. Emotional investing tends to result in poorer long-term performance on average, and investors that held diversified portfolios faithfully were rewarded for their steadfastness in 2021.
As the year closed out, the large-cap S&P 500 led the way performance-wise when measured on a yearly basis, notching a 28.71% gain. The benchmark for international stocks (MSCI ACWI ex-U.S.) saw a gain of 7.82% for the year. Bonds did not fare well, with the U.S. Bond Aggregate Index declining -1.54% for the year. While it was certainly a year for the bulls, some sectors performed better than others, with technology leading the charge.
Fed Taper Acceleration, Rate Hikes on Table
The Federal Reserve announced it is speeding up its tapering operation, expecting to conclude the taper by March 2022 instead of June 2022 as previously announced. As a reminder, the Federal Reserve buys bonds (U.S. Treasury issuances and mortgage-backed securities) during times of financial instability in order to increase money supply and lower interest rates as a form of stimulus. Tapering occurs when the economy has begun to stabilize and this stimulus is no longer needed. A taper sets the stage for rate increases. The Fed now sees three rate hikes in 2022, though the potential for COVID to derail the Fed’s plan does exist.
U.S. 10-year note yields rose for the month of December, ending 2021 at 1.511%, up from 0.93% at the beginning of the year.
Build Back Better
An additional area of uncertainty is the second portion of the spending bills the federal government has proposed, known as Build Back Better. This legislation covers topics surrounding child and elder care, infrastructure to address climate change, and the tax changes needed to pay for these programs. It contains revisions around retirement account contributions, estate taxes, and capital gains taxes amongst its provisions. Whether this bill will pass, and what form any such final bill would take, are unknown at this point. Our office is watching the continued discussions and will reach out to clients with news about changes should they come to pass.
The beginning of a new year means it’s time to review retirement account contributions. Are you taking advantage of your employer’s match? Have you contributed to your Roth or traditional IRA yet? The maximum contribution is $6,000 for both account types for 2022, $7,000 for workers age 50 and older. 401(k) contribution limits have risen to $20,500 ($27,000 if age 50 or above), SIMPLE IRAs to $14,000, and SEP IRAs to $61,000. HSA contribution maximums have risen to $3,650 for persons with individual plans, $7,300 for family plans (with an additional $1,000 contribution allowed for those age 55 and above). Please feel free to contact our office with any retirement planning questions you may have.
2021 was a good year for growth-oriented companies. Continued disruptions in typical living and working patterns due to COVID continued, creating opportunities for some companies and causing issues for others. We expect to see a continuation of this patchwork pattern for early 2022, with movement towards a new normal occurring later in the year.
We see indications of a general shift from growth towards value – companies that are often well-established, quietly making money. The anticipated rotation to value had a number of false starts during the year. We still anticipate value to gain traction as the market rotates from high flying growth sectors. International sectors look attractive as the world rebounds from COVID disruptions. These valuations are at historic lows when compared to U.S. markets. We will continue to invest in high quality securities and maintain diversified portfolios to both give clients exposure to sectors that are expected to perform well and to protect against unforeseen downsides. We look forward to seeing what 2022 may bring.
The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.