2021’s Biggest Market Themes…and What They Mean

2021’s Biggest Market Themes and What They Mean

January 3, 2022

Please note: This update was prepared on Friday, December 31, 2021, prior to the market’s close.

With final preparations for tonight’s Times Square countdown underway, four miles south, Wall Street traders are set to celebrate a remarkable year for stocks: The S&P 500 has hit 70 all-time highs this year despite myriad reasons it shouldn’t have—from inflation and infection to consumer uncertainty and global insecurity.

The market’s gains reflect some promising signs that, economically at least, Americans are carrying on despite the omicron variant, which has pushed daily COVID-19 cases to record highs of their own. In the week before Christmas, foot traffic at restaurants and retailers was up 4.8% from the beginning of the month. And four-week average unemployment claims have not just returned to pre-pandemic levels; this week they fell to their lowest mark since October 1969.

The positive data bodes well for corporate earnings and economic growth in the months ahead, and it may clear the Federal Reserve’s path as it proceeds with inflation-busting interest rate hikes.

As we turn the corner to 2022, we wish you and your loved ones a very happy, prosperous and especially healthy New Year and thank you for your trust and partnership.

stock market returns

A Year of Market Themes

Cryptocurrencies, NFTs and meme stocks got plenty of ink this year, even if they were little more than shiny distractions for disciplined long-term investors. As we prepare to pop the cork and sing “Auld Lang Syne,” we’re reflecting on some of the meaningful themes (not memes) that shaped financial markets globally in 2021.

#5. China—cracking down on capitalism. President Xi flexed his regulatory muscle this year, keeping enterprising Chinese behemoths like Alibaba, Tencent Holdings and Didi Global firmly under his thumb. He also made many other moves to rein in capitalism and reset the economic order in favor of “common prosperity” over big business.

Investors remain vulnerable to the Communist Party’s insular and unpredictable policymaking, but China is existentially dependent on foreign investment and the prosperity of its homegrown enterprises. Active managers who are expert in the region will be able to bargain-hunt amid the market turmoil.

#4. The S&P 500 (or ‘S&P 6’). Among iconic American tech companies, the rich got richer in 2021. At present, the six largest companies in the S&P 500—Amazon, Alphabet (aka Google), Apple, Meta (aka Facebook), Microsoft and Tesla—account for a quarter of the index’s market cap. Combined, they’re larger than the GDP of every country save the U.S. and China. Without the soaring returns of these tech titans, the S&P’s outsized annual return would be a whole lot smaller.

Much to our chagrin, diversification hasn’t been a benchmark-beating strategy in 2021: If you owned anything besides these six mega-techs, you’ve probably trailed the S&P 500. We don’t know when the “S&P 6” will come back to Earth; what we do know is that a diversified portfolio will prove profitable over time. Fundamentally, diversification is bound to have periods when it trails any single bundle of stocks. But there’s one thing we’ve learned in our nearly 30 years of experience managing wealth: You can’t argue with history.

#3. Inflation—back from a 40-year slumber. The American Rescue Plan provided another cash infusion and kept the economy from spiraling into recession. As consumers shopped, manufacturers struggled to keep up and the avalanche of demand caused severe backlogs at overseas factories as well as our nation’s ports. The stressed supply chain pushed prices higher, eventually leading Federal Reserve officials to concede that perhaps inflation wouldn’t be “transitory” after all.

You can pick whatever word you like—we still think the current inflation surge is a temporary phenomenon. Oil prices are coming down. Ports are clearing up thanks to increased productivity and support from an administration whose political fortunes depend in part on paring prices. As the pandemic recedes, consumers will be stockpiling fewer goods and spending on services again. And as we often say, the cure for high prices is…high prices. It won’t happen overnight, but we expect that in a year’s time the clamor over prices will have quieted substantially.

#2. The interest rate debate—the Federal Reserve shifts gears. As inflation escalated, policymakers resisted the urge to panic, remaining laser-focused on supporting the economic recovery with near-zero interest rates and bond purchases. This made it easier for consumers to finance home improvements and businesses to invest in technology and efficiency upgrades necessitated by the pandemic.

Thursday’s unemployment numbers reinforce our view that most of the folks who want to work are working, and the ranks of those who qualify for unemployment are getting thinner and thinner. The jobs picture also means that the Fed can focus on inflation rather than both inflation and job creation, which can be at odds during periods of economic distress.

Following its mid-December meeting, Fed officials signaled three rate hikes each in 2022 and 2023, while Chair Jerome Powell acknowledged that inflation would be a short-term threat. By raising rates gradually, the Fed seeks to beat back inflationary pressures while reassuring the markets that the economy is strong enough to sustain its growth pace. We’re on board.

#1. COVID-19 variants—as the virus evolved, so did investors, consumers and business. The year began on a promising epidemiological note as vaccines became widely available. Consumers embraced shopping from home and retailers adapted. By necessity, businesses in every sector incorporated long-overdue upgrades and technological advances to attain improved productivity and record profit margins. As the delta and omicron variants emerged and sent the country into fresh rounds of mini shutdowns, stock markets forged ahead even as the unbearably high human toll mounted.

From a medical standpoint, we’re hopeful that a silver lining of the omicron surge is that COVID-19 becomes endemic—more akin to the seasonal flu—with vaccines, boosters and post-infection immunities creating a population-level defense against the mutating virus’ spread. From a market standpoint, the challenges faced and solutions developed by businesses enabled companies to cope, persevere and thrive—the latest object lesson in the ingenuity and resilience of the American people.

One Chart That Sums Up Stocks in 2021

We monitor a wide range of data to form our outlook on the market and the broader economy—here’s one indicator our analysts have found enlightening or curious.

S&P drawdowns stock market 2022
Note: Chart shows percentage drawdowns from prior highs in 2021 using daily NAV values from 12/31/20 through 12/30/21 for Vanguard Admiral 500 Index. Source: Morningstar.

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso

On the surface, 2021 was a smashing year for investors. With one day to go, Vanguard’s 500 Index fund has gained 27% (and that’s without including dividends) with barely a drawdown to speak of—the index fund spent all but two days at or within 5% of an all-time high. Historically, the index fund has dropped 14% or so on average in any calendar year. We’d happily take another year like this one for the U.S. stock market, but we would not count on more of the same in 2022.

Financial Planning Friday
Create or Revise Your Financial Plan

As our chairman, Dan Wiener, likes to say: “You can’t put a price on a good financial plan, so we don’t.” In the year’s final financial planning update, we’re taking a step back from the specifics to reflect more broadly on our financial planning philosophy and how we implement it for our clients. Here’s how we will work with you to create or revisit your financial plan in the new year so that we can help you reach your goals and achieve peace of mind.

  1. Define your destination. Before we begin your plan, we will discuss and agree on your goals and objectives. They may include saving for college, buying a vacation home—or something else entirely. Let’s take the goal of funding your retirement: You may want to retire early. We’ll discuss how soon you can stop working given your income stream, asset level and desired lifestyle. Or you may choose the scenic route: Spending some of your savings on vacations and other splurges and working longer. Just as no two trips are alike, so it goes for financial plans.
  2. Create your financial GPS. Often, you know where you want to end up (paying off debt, giving a sum of money to charity or leaving a legacy for your heirs) but countless paths exist to get from point A to point B—which one is right for you? By taking an in-depth look at your assets, liabilities (debts) and sources of income, we will work together to create a road map to follow to reach your goals.
  3. Lay out your path (including alternate routes). Once we have a grasp on your goals and current financial picture, our team will present your plan and discuss it with you in detail. Going forward, we will adapt on the fly to present alternative routes if your situation changes. Speed bumps like tax hikes or rising inflation are inevitable. Windfalls are common as well. We commit to monitoring and updating your financial plan with you regularly.
  4. Remember, the journey is never-ending. Financial planning is a process; it’s not a product or a one-and-done exercise. We view your plan as a living document that we will adjust along the way to ensure you have the solid footing to get where you want to go.

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Podcasts for a Tumultuous Year

Take a listen to (or read the transcripts of) our top five The Adviser You Can Talk To podcasts of the year—plus a special bonus, our 100th anniversary episode!

Biden Tax Hikes: What We Know Now. An in-depth and accessible guide to preparing finances for proposed tax hikes from the new administration. (June 2, 2021)

The S&P 500 Index: Is It All Investors Need? Dan Wiener and Jeff DeMaso dig into the myths and realities of passive investing and make their case for active management. (November 17, 2021)

Smart Money Moves for 2021. We released this popular episode at the beginning of 2021, but the tips to help you take control of your finances and action items are timeless and highly relevant to 2022. (January 27, 2021)

Is It Time to Convert to a Roth IRA? Two of our financial planning leaders break down three crucial questions to answer when you’re considering a Roth conversion. (October 6, 2021)

Investing Insights From Our Research Team. Our panel of investment strategists got together at the beginning of the year to look at big-picture trends for 2021 and how those were affecting their investment recommendations. How well did they do? (January 20, 2021)

Our 100th Episode: What to Do With $100K. In addition to helping clients reach their financial milestones, Adviser Investments reached its own landmark with the release of the 100th episode of The Adviser You Can Talk To Podcast. We celebrated the occasion by having our financial planners pull out some lifelong financial planning lessons while thinking about how they’d manage a $100,000 windfall. (December 1, 2021)

Thanks for listening, and don’t forget to subscribe via your favorite podcast platform for many more episodes to come!

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

No trades this week.

AIQ Tactical Global Growth

Buy iShares US Healthcare Providers ETF (IHF)

Sell iShares Core S&P 500 ETF (IVV)

AIQ Tactical Defensive Growth

Buy iShares Core S&P 500 ETF (IVV)

Sell Cash

AIQ Tactical Defensive Growth

AIQ Tactical Multi-Asset Income

Buy Invesco DB Agriculture Fund (DBA)

Sell Invesco DB US Dollar Index Bullish Fund (UUP)

AIQ Tactical High Income

No trades this week.

AIQ Tactical High Income

Adviser Investments in the Media

This week, Vanguard’s website outage had Dan Wiener in high demand among the financial press. Dan spoke about this latest Vanguard tech snafu with ThinkAdvisor, CNBC, The Philadelphia Inquirer, RIABiz and Ignites.

Chief Investment Officer Jim Lowell stopped by Fox Business, where he offered his 2022 market outlook and discussed whether the market can sustain the outsized gains for stocks.

In Today’s Market Takeaways, Vice President Steve Johnson reflected on what a long, strange trip this year’s been.

Looking Ahead

The new year kicks off with a slew of meaningful reports we’ll be poring over, including numerous manufacturing reads, construction spending data, job openings and “quits” figures, the minutes from the Fed’s meeting earlier this month and the December unemployment rate.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future and a very happy New Year. See you in 2022!

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $7 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


Please note: This update was prepared on Friday, December 31, 2021, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein—including but not limited to the Your Question Answered section—should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances. Information regarding purchase and sale of specific strategy trades is for selected investment strategies managed by Adviser Capital, a division of Adviser Investments, LLC. For information on strategies not addressed above contact us at (800) 492-6868.

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