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2021 Market Analysis

2021 Market Analysis

March 02, 2022

2021 was a year of transition for both the world and investors. From the reopening of the economy and the debut of coronavirus vaccines to the introduction of meme stocks and a new presidential administration, numerous factors influenced the market performance last year. While 2021 was a watershed year for the largest S&P 500 companies generally, it also brought to light several developments and opportunities investors will need to account for when developing or modifying their investment strategies.

Here are some of our team’s observations about what occurred in 2021, and how it will impact our investment approaches with clients heading into the coming months.

A Banner Year for Stocks. The S&P 500 capped off a third straight year of double-digit gains, gaining approximately 27% with 70 different closing values that set new all-time highs. However, this progress came bundled with disparities. While last year marked the first time since 1997 the S&P 500 index outperformed the other U.S. indices as a whole, its ten largest members were up 40% on average compared to 27% for the entire index. Therefore, there was a significant disparity in the gains between the index's large-cap, blue-chip stocks and its mid-to-small-cap members.

Small-Cap and Mid-Cap Troubles. Despite the promises the most significant large-cap stocks brought, small and mid-cap technology struggled. The reason? Rising inflation foreshadowed rising interest rates, which become an issue for companies that have yet to reach profitabilityThese companies are borrowing more money now to set themselves up for profitable years down the road. As a result, we tracked notable underperformance from small-cap technology companies throughout 2021.

Oil on the Rise. 2021 also proved to be a boon for the energy sector. The energy sector was the best performing sector after four straight years of being the worst. As economies reopened, this development arose from renewed demand for oil to fuel transportation, travel, and product production.

Looming Inflation.  The consumer price index rose 7% from January through December 2021, representing the highest inflation growth in forty years. Much of this blame, in our view, is a result of supply-chain constraints that coincided with the reopening of the economy and increases in demand. The FED, considering inflation to be transitory, was delayed in action and finally in December announced plans to step up the amount, number, timing of planned interest rate hikes. Therefore, the Fed's 2021 decisions likely exacerbated 2022’s ongoing inflation issues.

A Bullish Ride.  Throughout 2021, there was consistent outperformance in the equity markets. In reviewing metrics such as price to earnings, price to sales, and price to book, we were seeing overly-extended valuations at historic peaks and that continued through the year. There was also a record number of special purpose acquisition companies (SPACs) bringing companies public, easing companies’ access into the markets creating plentiful investment opportunities.

The Retail Investor's Rise.  The combination of increased access to financial apps such as Robinhood and Coinbase, fractional trading, meme stocks, and FOMO-driven investment approaches signaled the retail investor's arrival. Pandemic-facilitated free time and work-from-home environments encouraged more individuals to join the WallStreetBets crowd and take up investing as a strategy or hobby. 2021 led, therefore, to massive acceptance of emotion, nostalgia, and hype-driven investing that disrupted traditional playbooks.

Chinese Equities.  The Chinese markets drastically declined in the latter half of February and continued falling throughout the year. There were concerns that the government was planning to severely limit the amount of outside investment into China-based corporations, prompting concerns about intellectual property integrity and personal information security. Ultimately, the Chinese government recognized the growing influence and control capitalistic individuals, and corporations were gaining over Chinese society, which departed from China's entrenched communistic principles. Many believed that U.S.-graded companies would leave the mainland and that Chinese companies would get delisted on U.S. exchanges. However, we found many of those concerns to be overstated and not as extreme as investors were bracing for.

Looking Forward to 2022

Ultimately, if there is anything that 2021 taught us, focusing on diversification and less on overweighted strategies remains vital. It's important to remember that what ultimately drives the markets are corporate earnings and economic growth. If both aspects are not in harmony in the short or intermediate term, volatility will occur. At JK Investment Group, we will continue to monitor how the aftereffects of 2021 will impact market developments and help your investment strategies heading into 2022.

Securities offered through Regulus Financial Group, LLC. Member FINRA/SIPC. Investment advisory services offered through Regal Investment Advisors, LLC, an SEC Registered Investment Advisor. Registration with the SEC does not imply any level of skill or training. Regulus Financial Group, LLC and Regal Investment Advisors are affiliated entities. JK Investment Group is independent of Regulus Financial Group, LLC and Regal Investment Advisors.