To the surprise of many, 2021 was a wonderful year for stocks. Despite the extensive list of worries, the stock market continued to grind higher, setting new records by year end. In our 2021 outlook one year ago (https://www.cedarstoneadvisors.com/post/the-year-ahead-2021-outlook )we identified three major trends that were likely to drive stock prices higher 1) Extremely low interest rates engineered by the Federal Reserve 2) More stimulus from Congress now and in the future, and 3) A receding virus beaten back by the vaccine. Now that 2021 is in the rear-view mirror we can clearly see that the first two trends, the Federal Reserve’s easy money and Congress’ stimulus, overwhelmed other concerns, including the persistence of the virus. Indeed, one of the surprises of 2021 was that despite the vaccines more people died of Covid in 2021 than in 2020. Even more surprising is that the market shrugged off the bad Covid numbers as governments, businesses and consumers learned to simply live with the disease.
Federal Reserve policy continued to be one of the driving forces behind the stock market run as quantitative easing, the action of the Federal Reserve purchasing treasury bonds, continued. Arguably, the Federal Reserve’s intervention kept interest rates 0.5% to 1% lower than they ‘should’ have been based on historical fundamentals. As we have discussed previously, a low interest rate environment is highly stimulative, but can also lead to inflation. Sure enough, the Federal Reserve’s stimulus resulted in some of the highest inflation numbers in decades, rising to 6.8% by November 2021. The Federal Reserve tried for months to argue that the inflation numbers were ‘transitory’ but had to finally admit that inflation was a problem by year’s end, promising and end to quantitative easing and higher rates in 2022.
Congress too, not to be outdone by the Federal Reserve, piled on the stimulus, adding the $1.9 trillion American Rescue Plan in January 2021, bringing the total stimulus, as chronicled in our “Adding Up the Stimulus” https://www.cedarstoneadvisors.com/post/adding-up-the-stimulus article to $5.5 trillion, a massive figure equal to about 25% of the to economic activity of the United States. When my clients ask why the stock market continues to rise, the Federal Reserve’s intervention and Congress’ stimulus are always at the top of my list.
When 2021 began the vaccines were just beginning to be widely available, and many promised that the drugs would mean the end of the Covid scourge. Whether you believe in vaccines or not, the result in 2021 has been terribly disappointing. 2021 Covid deaths exceeded Covid deaths in 2020, and cases rose to new highs, even among the vaccinated. Nonetheless, the markets appear to have completely decoupled from Covid cases. Covid has become more of a ‘known’ risk, and governments largely have decided that lock downs are not helpful, limiting the economic impact of the virus’ spread. If anything, the terrible Covid results may have contributed to the stock run-up by causing the Federal Reserve to delay acting on inflation.
In addition to the Covid surprise, the market overcame several significant ‘worries’ as we chronicled in our October article https://www.cedarstoneadvisors.com/post/the-worry-list. Among the biggest concerns were the Evergrande collapse in China, a global spike in energy prices, widespread inflation, and the looming debt ceiling. Such concerns were valid and could have tripped up the market. However, with the benefit of hindsight we can see how the stimulative policies rolled over these concerns as well.
The bottom line is that corporate profits continued to rise to record levels and that fact drove stock prices higher. 2021 was a momentous year to be an investor. Next week we will look at the outlook for 2022 as we consider the trends that are likely to define the coming year.