As 2021 drew to a close, the market made significant improvements over the prior year, but there was plenty of volatility along the way. That said, the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite all finished the year with near-record highs. The NASDAQ finished 2021 21.3% higher, while the Dow increased 18.7%.
The S&P 500 was the biggest stock index winner last year, with a gain of 26.9%. The Russell 2000 ended the year on a lesser note, finishing 13.7% higher. Small caps experienced mostly rangebound activity throughout 2021 because many smaller companies struggled to be profitable.
Q1 COVID Continues
The new year resumed with general concern about the impacts of the coronavirus on global markets. However, the $1.9 trillion COVID-19 stimulus package announcement, which followed the inauguration of President Biden, provided some reassurance and economic strength.
Unfortunately, the continuation of COVID-19 lockdowns began to create supply chain disruptions. This, along with the stimulus deal, continued to build an inflation theme for the year. During this time, the Federal Reserve mentioned that short-term price increases were not a concern, but United States bond yields started to rise along with the dollar.
Moving into the quarter, both stocks and crude prices continued to recover on optimism that a mass rollout of COVID-19 vaccines could help global economies reopen and bring back a possible return to normalcy in the market.
Q2 Inflation Continues
The Fed remained committed to maintaining an economic stimulus, holding its view that price increases would be “transitory.” However, inflation fears began to take hold in the market as consumer and producer prices continued to rise. Shortages for both labor and materials and higher wages and shipment delays added further pressure to the situation.
Turning to the economy, U.S. job growth initially had disappointing numbers early in the quarter, with the April monthly jobs report showing only 266,000 new jobs were added in the period. The market had expected 1 million. This weaker-than-expected number caused concern about whether extended unemployment benefits were keeping workers from seeking employment. However, some of these concerns were alleviated in the following month as the economy added 850,000 jobs. Still, unemployment remained above 6%, as roughly 2 million Americans were absent from the post-pandemic labor force.
Q3 Infrastructure Spending
A debate began on the Senate floor over the $1 trillion stimulus bill to help rebuild the nation’s infrastructure. This included broad improvements for bridges, rails, and roads, along with money for broadband build-out and clean energy initiatives.
In July, a Federal Reserve meeting showed that the economy was making steady progress. However, the Fed maintained asset purchases, saying that keeping the current target rate was correct until labor market conditions improved. Later in the quarter, Chairman Powell stated that tapering could begin as soon as November in the Federal Open Market Committee meeting. Additionally, he mentioned rate hikes would not start until the tapering was complete.
A seasonally weak September held firm as markets dipped sharply, with the S&P 500 and NASDAQ falling about 5% and the Dow ending the month more than 4% lower.
Q4 Transitory Inflation to Inflation
The quarter started off with all eyes on corporate earnings, as investors were looking to get a sense of how companies were handling cost increases. The result? Corporations were collectively able to deliver their strongest quarterly earnings in more than 10 years, as they passed most of their cost increases on to consumers. These results helped lift the S&P 500, Dow, NASDAQ, and Russell 2000 to all-time high levels.
Investors saw market risk shift to a new coronavirus variant from South Africa as the fourth quarter progressed. Omicron shocked the markets and caused lockdowns to resume in many parts of the world. Investors anxiously waited for more details to emerge on the severity of the variant.
In testimony before Congress, Chairman Powell noted that it was time to remove “transitory” from inflation discussions. U.S. inflation growth had been rising at its fastest level in over three decades. Later, the Fed signaled that bond tapering would be increased at a rate that would allow for rate hikes to begin. Fed members had a hawkish surprise for investors, forecasting three rate hikes for 2022 and three more for 2023. Ultimately, Powell acknowledged the threat of inflation but then assured the markets that the economy was strong enough to handle the Fed’s plan to tighten it.
A late “Santa Claus rally” occurred in the final weeks of the year, lifting markets back toward all-time high levels. However, investors still remained cautious about the economic threat of the growing Omicron variant infections.