Fourth Quarter Market Commentary

The Stock Market Turned in a Solid Performance in 2021.

Happy New Year!  As we turn the page on the calendar, we once again reflect on a year that presented many challenges. Yet, except for a few brief sell-offs, the stock market turned in a solid performance in 2021. The S&P 500 gained 26.9% for the year. The Dow Jones Industrial Average (DJIA) gained 18.7% in 2021, while the Nasdaq Composite gained 21.4%.

Over the course of the year, investors brushed off news that could have derailed stocks in years past. A contested presidential election, historically high inflation, supply chain disruptions, forecasts calling for a correction (that never appeared) — none of these events stopped stocks from posting all-time highs. Not even the still-raging global COVID-19 pandemic, or its Delta and Omicron variants.

In fact, the S&P 500 posted 70 all-time highs in 2021, a record that’s second only to 1995.  The 2021 market was bifurcated with an initial surge in some high-flying growth stocks, but then many of those names fell hard, and some of the big-cap names in the S&P 500 turned in super-charged performances.  Cyclically sensitive stocks strongly outpaced more economically defensive ones. Oil and other commodity prices surged. Energy was the top performer of the major sectors in 2021, up 48%, its best increase ever.

“The very robust economic recovery gave investors a big reason to remain optimistic.

The very robust economic recovery gave investors a big reason to remain optimistic. There has been a really strong fundamental story unfolding from a macroeconomic perspective. With the economic expansion, as well as the bull market, only being a few months old when 2021 began, the market’s performance isn’t so surprising – and could very well continue.

The labor market recovery has been particularly notable. Since April 2020, the US has added 18.5 million nonfarm jobs, and the number of people filing for unemployment claims has recently reached a 52-year low. Dynamics have also swung in favor of workers over their employers, which has emboldened millions of workers to quit their jobs at unprecedented rates, or demand higher wages. Upward economic mobility has long been at the heart of the “American Dream” and has returned with a vengeance.

The stock market in 2021 also benefited from a very accommodative Federal Reserve. Throughout the year, the Fed kept interest rates near zero and continued pumping billions of dollars into markets each month. This not only encouraged investors to seek out assets with higher returns, like stocks, but also contributed to higher inflation.

It was indeed inflation, and its potential impact on economic growth and the stock market, that was one of the biggest stories of 2021.  The year ended with the Consumer Price Index (CPI) rising at the fastest pace since the early 1980s, meaning that it’s likely the first time that many consumers and investors have dealt with this type of inflation.

Investors are keenly aware that the Fed’s support will undoubtedly come to an end. The big question on Wall Street for much of 2021 was when that would ultimately happen.  The Fed has indicated plans to increase the fed funds rate at least three times in the new year to temper inflation.  This could happen as early as March, and would be the Fed’s first rate hike since 2018.

As the Fed eases up its support, investors will once again focus more on whether the fundamentals that drive stock prices—the pace of economic growth and corporate earnings—can support another year of double-digit gains.

From our perspective as portfolio managers, we are focused on whether a major shift in sentiment is occurring.  Particularly, whether growth stocks will finally take a back seat to more value names.  As we write, a major selloff has been in play, with growth stocks in the crosshairs.  The NASDAQ, which is predominately made up of high-growth tech stocks, has started the year with a significant decline. The “Santa Claus” rally, that saw tech stocks rally the last few days of 2021, has quickly reversed itself to start 2022.

This rotation out of higher valuation growth stocks began late in the third quarter of 2021, and persisted through the fourth quarter.  Much of this was driven by a compression in valuation as interest rates rose, the Fed signaling a much tougher stance on its accommodative policies for 2022, and market participants’ fears of higher inflation, which further impacts interest rates.

From a technical analysis perspective, we have seen the relative performance of value improve dramatically relative to growth.  This is evident when comparing the relative performance of certain sectors – such as regional banks (value) versus technology software (growth) or in analyzing the Russell 1000 Value Index relative to the Russell 1000 Growth Index.  While this relative outperformance began in September of 2020, it accelerated during the fourth quarter of 2021 and appears to be persistent.



“Many different arguments can be made for value outperforming growth going forward, but the simplest may also be the most valid – a cyclical reversion to the mean.”




Many different arguments can be made for value outperforming growth going forward, but the simplest may also be the most valid – a cyclical reversion to the mean. Growth has outperformed value over the last 10 years or so, during this unprecedented run of ultra-low interest rates.  The biggest headwind to value’s performance has been the Fed’s Quantitative Easing and falling interest rates, but during periods of rising rates, value generally has outperformed.  When rising inflation expectations are added to the mix, the signal for value outperformance is more compelling.

A few sectors have been showing a positive relative trend.  Energy, Basic Materials, Transports, and some Financials, in particular, have been trending positive. These are all cyclical groups, and also have general positive exposure to reflationary trends. Inflation, incidentally, in isolation, is not a bad word. The real risk to markets is too much inflation hurting consumer confidence, or producing fear of uncontained inflation.  This is not necessarily what markets seem to be pricing. If markets were worried about either of the above, defensive sectors and/or growth stocks would be leading. Instead, we are seeing cyclicals lead.

As always, it is important to consider these factors over the long term. Market dynamics, such as a major sector rotation, don’t happen overnight.  They produce many ups and downs and false starts.  The expectations of a first interest rate cut during a tightening cycle usually creates waves, but don’t often indicate a discernible trend.

Given the current backdrop, there is no better time to review your goals, revisit your future expectations and evaluate your overall asset allocation and risk tolerance.  We strongly encourage you to take advantage of all the capabilities that our firm brings to bear, which will help you to live with increased financial confidence.

Please feel free to reach out to us to review your personal situation, so we can ensure that we have built your portfolio to accommodate your various needs, and address any concerns that you may have.  We appreciate the opportunity to serve you, and appreciate the trust and confidence that you have placed in our firm.

Scott A. Goginsky, CFA®
Partner, Research Analyst
Portfolio Manager


Sources: Index returns – Forbes, Bloomberg; Sector performance – CNBC; Labor market, CPI – Forbes; Growth vs. value – JP Morgan

The information set forth regarding investments was obtained from sources that we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance does not guarantee future results.