As we kick off 2022, it’s worth looking back a little bit. Major U.S. equity indexes enjoyed positive results in the final month of the trading year. Gains in U.S. indexes were cemented by the Santa Claus rally in the final trading week of 2021, and long-term investors with broad market exposure enjoyed a happy holiday season!
As one indicator after another showed increasing inflation metrics during December, the S&P 500 continued to respond with fresh all-time highs. Broadly solid corporate earnings and a resilient consumer despite Omicron and inflation contributed to the S&P 500 finishing 2021 as the third consecutive year of double-digit percentage gains. Not bad considering the uncertainties in play.
For the month of December, the S&P 500 gained by 4.36%, the Nasdaq 100 added 1.14%, and the Dow Jones Industrial Average increased by 5.38%.
2021 Rewarded Long Term Investors
What a long, strange trip it’s been. 2021 featured spiking inflation, employment data zig-zags, higher interest rate anticipation, and folks that panic-sold. All the while, the S&P 500 ($SPX) continued its upward ascent (over time) throughout the year. Emotional investing tends to result in poorer long-term performance on average, and the folks that held diversified portfolios faithfully were rewarded for their steadfastness in 2021.
As the year closed out, the large-cap S&P 500 led the way performance-wise when measured on a yearly basis, notching a 26.89% gain. The Nasdaq added 21.39% in 2021, and the Dow Jones Industrial Average tacked on 18.72% for the year.
Unemployment Data vs. Job Creation
For the week ending on December 25th, Weekly Jobless Claims totaled 198,000–below the forecast of 205,000. This data release was another historical one, showing the lowest level since 1969. This report was preceded by data earlier in the month, when Weekly Jobless Claims fell to 184,000. Keep in mind that these data points are for initial unemployment claims. We have been seeing historical levels here – near 52-year lows.
While weekly unemployment claims metrics fell steadily throughout 2021, recent U.S. Non-Farm Payroll reports have displayed mixed results. The big non-farm payroll “jobs number” measures the change in the number of employed people during the previous month (not including the farming industry).
It is quite the phenomenon here – lower weekly claims combined with fewer than expected jobs added. Where have the working people gone?
Fed Taper Acceleration, Rate Hikes on Table
The Federal Reserve announced it is speeding up its tapering operation and expects to conclude the taper by March 2022 instead of June 2022. The faster taper also sets the stage for rate increases. The Fed now sees three rate hikes in 2022, though the potential for Omicron to derail the Fed’s plan does exist.
U.S. 10-year note yields rose for the month of December, ending 2021 at 1.511%, up from November’s closing level of 1.442%.
December’s market performance was a fitting end to the year and a microcosm of 2021. Major U.S. market indexes exhibited gains for the month. In the short term, the prevailing market themes remain centered around inflation and job growth for the time being. Uncertainty over Omicron remains exactly that: uncertain.
Higher interest rates are scheduled to become a reality in 2022 and will be partially dependent on the broader effects of Omicron on the U.S. economy.
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