Coming out of 2020 (an unprecedented year, to say the least), there was a lot of uncertainty about the direction of the markets given the continued effects of the COVID-19 pandemic. However, we remained optimistic that the strong stimulus, as well as the measures being taken to slow the pandemic, would be likely to improve conditions throughout the year. In 2021, we saw a positive move forward in the economy and the markets. Here is a breakdown of what happened this year, and what we can expect moving into 2022.
Early Positive Momentum, with a Little Bump.
The market started off positive carrying momentum from the end of 2020, but then hit a bump in the road at the end of January into February. This was caused by a dramatic increase in the 10-year bond yield, which saw a 0.70% increase over the course of one month. The move was a reaction to remarks from the Federal Reserve in regard to the potential of inflation as the economy continued to recover from early 2020. The 10-year yield and the equity markets settled out in March. The Treasury yields declined over the next few months and the markets went on a positive run from March until September.
Yield on the 10-Year Treasury Bond vs. S&P 500.
Slight Uncertainty with Inflation and the Omicron Variant
In September, the market seemed to be overdue for a correction following a steady run from March. Inflation remained a big concern and the numbers were showing it. We had seen five straight months with over 5% inflation from May into September. In October, the annual inflation rate was 6.2%, which is the highest since November 1990 (https://tradingeconomics.com/united-states/inflation-cpi). The concern around continued inflation, along with the uncertainty of the Omicron variant and the effect it will have worldwide, has caused some volatility in the recent weeks heading into the end of the year.
Inflation in 2021 from the US Bureau of Labor Statistics.
Positivity into 2022
We continue to remain positive about the equity markets and the economy moving into 2022. There are a number of items that we are continuing to monitor as we look to next year. The potential for the Federal Reserve raising interest rates in early 2022 along with tapering (systematically decreasing the amount of assets the Fed is purchasing each month) and inflation are several potential areas of concern. Despite these concerns, we remain positive regarding the overall equity markets and economy as we enter 2022.
As always, we continue to observe all areas of the markets and economy and work to be proactive in making the necessary adjustments for our client’s portfolios.
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