By: Ryan P. Johnson, CFA, CFP® - Director of Portfolio Management & Research
Now that we’ve settled into the new year, let’s do a quick review of the markets, jobs, inflation, the Fed, and lay out some big, round numbers to keep in mind as we move into 2022.
Stock markets had a strong 2021. The S&P 500 returned 28.7% and each of the 11 sectors saw double-digit gains. There were over 70 new highs hit during the year and every month saw a new high, matching the 12-for-12 record from 2014.
Bond markets, however, saw losses. For only the second time in the past 20 years, the Barclays U.S. Aggregate Bond Index posted a calendar year loss, declining over 1.5%. The loss resulted from rising interest rates, which caused bond prices to decline.
The Federal Reserve recently took a more aggressive tone towards reducing its nearly $9 trillion balance of bonds it holds, which is roughly double in size from the start of 2020. Treasury yields have recently moved higher, nearing levels from early 2020. The 10-year Treasury yield recently touched 1.8% and we could see it surpass 2.0% in 2022.
As of this writing, the futures market is pricing in four rate hikes from the Federal Reserve this year, which would take the effective Fed Funds rate to just over 1%. Higher rates from the Fed will result in higher loan rates for consumers and businesses, but this is coming at a time of economic strength.
Inflation remains high but is expected to taper as the year goes on. Headline consumer inflation in 2021 was 7.0%, with core (which excludes food and energy) at 5.5%. Above-headline inflation came from energy (gasoline and gas utilities), commodities, and vehicles (new and used). Inflation in 2021 was actually below the headline 7.0% average for food, apparel, services, and shelter, though shelter inflation readings tend to lag in the report. Unfortunately, auto manufacturers do not see a near-term end to the chip supply shortage but used car prices are expected to fall later in the year.
Finally, we want to highlight some big, round numbers that have been reached and some that may be seen in the year ahead.
• As mentioned, the unemployment rate has already fallen below 4% and the yield on 10-year Treasury bonds may surpass 2%.
• As we turned the corner into 2022, we saw Apple (AAPL) briefly touch a $3 trillion market cap and its weight in the S&P 500 is nearly 7%.
• The S&P 500 recently touched a new high of just over 4,800 and we could see the index pass the 5,000 level for the first time later this year.
• Lastly, the Dow Jones Industrial Average, which bottomed at 6,470 in March of 2009 and 18,214 in March of 2020, may approach 40,000 in 2022.
As Buckingham Advisors continues to add new talent to serve the growing needs of our new and existing clientele, our focus remains on one family, one business, one foundation at a time. If someone in your life would benefit from our professional insights and financial services, please send the link below to your friends and family. We are always interested in assisting other successful business owners, families, individuals, and purpose-driven foundations with their financial needs: https://mybuckingham.com/contact.
Thank you for your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Director of Portfolio Management & Research
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.