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December 22, 2021

Equity Market Commentary - December 2021

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Takeaways & Key Expectations

Equity Market Commentary - December 2021

Equity Market Commentary - December 2021

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December 22, 2021

 
 

Will the Bears have a better 2022? Or will the Bulls surprise yet again?

We have many sports teams here in Chicago, but for 2021, two notable ones are the Chicago BULLS of the NBA and the Chicago BEARS of the NFL.

The Bears came into the 2021/2022 season with high hopes and great fanfare. The Bulls?…yawn.

How wrong those expectations have been! The Bulls are blazing this year with one of their best records since the Michael Jordan era. The Bears? A big disappointment. (As a long-time Chicago Bears fan, it pains me to say that the Green Bay Packers have truly ”owned” da Bears.)

There is a parallel to the 2021 year for the stock market. Bull market believers were too restrained, while Bear market believers were too confident.

If we rewind the clock to our January 2021 Slimmon’s TAKE, we wrote:

 
 
"
We expect 2021 to be similar to 2010, the second year of a new bull market. Following the historically strong year in 2009, the market returned a good year overall in 2010*.
 
 
 

In 2010, the S&P 500 returned just over 15%. Unless things continue to be very ugly these last couple of weeks of the year, which I doubt, the S&P 500 is going to pull a ‘Chicago Bulls’, not a ‘Chicago Bears’. Far better than what most expected.

I’m not a market sage. I just know that patterns tend to repeat themselves, primarily because human behavior really does not change. Central banks pump liquidity into an economic problem, but investors only start to feel better about the situation as the problem recedes further into the rear-view mirror. Usually it takes at least one year before investor sentiment lifts. The ensuing 2021 inflows combined with stellar corporate earnings results drove equities up this year just as they did in 1991, 2003 and 2010, all second years after recessionary lows.

For those who predicted a more bearish 2021.…well, they have gone the way of Chicago Bears fans. More importantly, they ignored history. It was simply too soon following the March 2020 low to become negative.

So, as we consider a first pass on what the equity market holds for 2022, here are the S&P 500 returns the third year off recent recession lows:1,2

I.                     1992 +7.62% (bear market low 1990)

II.                   II. 2004 +10.88% (bear market low 2002)

III.                 III. 2011 +2.11% (bear market low 2009)

See the historical consistency? Positive, but far more modest returns.

Less good for the Bulls, less bad for the Bears.

This makes sense to me.

In this second year past the recession low, we have had very strong fundamentals AND a supremely accommodative Fed. But in the third year, there will likely be more of a battle. On one hand, we believe strong corporate fundamentals will continue to exceed Wall Street’s expectations. Yet central bank policy will begin to pivot from its accommodative stance. That will result in lower, but positive, returns.

To conclude, I don’t believe 2022 will be all that different than we’ve experienced in the past. As stated above, I am very confident about corporate fundamentals. However, the Fed is going to throw a little cold water on the environment. Hence, I expect mid to high single-digit returns for the equity market next year.

Too simplistic? Fair criticism. Yet, what I know is that the bear calls for significant corrections in 2021 kept many investors on the sidelines resulting in a loss of focus on what really matters. Namely that stocks have done well in the second year of a bull market.

What worries me is that even though 2022 will likely be another decent, but not spectacular, year, larger drawdowns along the way (quite likely in a lower returning environment) will allow the Bears to roar a little louder, thereby scaring even more investors.

In the end, I suspect the Bulls will outshine the Bears yet again in 2022.

Of course, this is at the overall S&P 500 level. Alpha opportunities for stock picking will abound, just as they have this year.

 
 

* 2021 Slimmon’s TAKE: 2021 Market Outlook, January 2021
1 First year being the year of the low.
2 S&P 500 total return

The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See Disclosure section for index definitions.

 
andrew.slimmon
Head of Applied Equity Advisors Team
 

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