2021 goes down as a year of high risk and high reward for markets
U.S. stock markets were poised Friday to record a third straight year of growth, with major indexes posting double-digit gains in 2021 as investors cheered the economic recovery and looked past continuing uncertainty wrought by the coronavirus heading into the New Year.
The celebratory end to 2021 on Wall Street contrasts sharply with the slump felt by millions of Americans contending with the rampant spread of the highly-transmissable omicron variant. As the pandemic enters its third year, the nation also is facing challenges on the economic front, with inflation soaring to near 40-year highs and the labor market wobbling as fresh covid outbreaks shut down businesses and worry consumers.
But even omicron doesn’t appear to have dampened the mood among investors, as the markets continued to exhibit the puzzling strength they have shown throughout much of the pandemic.
The major indexes were flat Friday, 2021′s final day of trading. The Dow Jones industrial average fell slightly, but tipped back into the green shortly after Friday’s open, rising 30 points, or 0.9%, to 36,431. The S&P 500 index ticked up about 6 points, to 4,785, and the tech-heavy Nasdaq rose 16 points to 15,758.
While December can be notoriously slow as trading thins out around the holidays, this month saw plenty of volatility as investors reckoned with fallout from a stunning wave of omicron infections, the Federal Reserve’s pivot toward tackling inflation and the temporary shelving of President Joe Biden’s massive Build Back Better spending plan.
The markets’ prevailing positivity may be confounding in a year of acute economic challenges. Yet 2021 also saw strong corporate profits bolstered by exuberant consumer spending – even in the face of higher prices and supply chain delays.
“The enthusiasm emanates from the fact that Corporate America, as defined by earnings, is doing really well,” Wayne Wicker, chief investment officer at MissionSquare Retirement, told The Post. “We’ve seen record earnings and profit margins on the rebound this year, and that’s what drives stock prices.”
S&P 500 earnings are projected to be up 45% year-over-year in 2021, according to FactSet, an unusually high rate of growth resulting from strong corporate earnings and an easier comparison to weaker earnings in 2020, when the initial shock of the pandemic hobbled businesses.
While markets hate uncertainty, investors tend to “look through” the kinds of transitory issues that dominate headlines, from surging covid caseloads to labor market conditions, Wicker said, making decisions for a multiyear time horizon. A frightening lack of information fueled panic in the early stages of the pandemic, he said. But in 2021, the combination of vaccines and a growing font of data about covid-19 has taught the market “to look through each wave of the pandemic.”
This helps to explain why market jitters over omicron subsided relatively quickly in late November and early December, even as the variant spurred a new wave of business and travel restrictions in the United States and abroad. Investors have taken further assurance from a recent decision by the Centers for Disease Control and Prevention to shorten quarantine time for asymptomatic people, as well as from the lighter overall policy approach by world leaders trying to protect the economic recovery, according to Ivan Feinseth, chief investment officer of Tigress Financial Partners.
“The underlying narrative is positive,” Feinseth said in a commentary Tuesday, “with expectations we will see another year of strong corporate revenue, earnings growth and excess cash flow generation in 2022.”
Beyond the marquee figures, companies’ bottom lines have been pummeled by an array of threats and uncertainties, according to Liz Ann Sonders, chief investment strategist at Charles Schwab. Ninety-three percent of companies on the S&P 500, and 89% of those listed on the Nasdaq have seen their shares slide 10% or more at some point this year.
For all the talk of Wall Street’s resilience since the five-week bear market in 2020 at the beginning the pandemic, the “weakness and churn” below the surface has been “severe,” Sonders said. But pockets of weakness have been met, she added, by “offsetting pockets of strength.”