As we entered 2022, investors were celebrating more record highs on the S&P 500 and were cheered by having just finished the fourth year out of five with 15%+ returns on the stock market. Markets, in many ways, knew that major risks existed through the December rally, including the unresolved Omicron variant of COVID-19, ongoing inflationary and supply chain issues, and a U.S. Federal Reserve set to tighten monetary policy in order to address inflation.
Even so, markets continued their calm march higher, with the S&P 500 ending 2021 up 26.89%, after finishing 2020 up 16.26% and 2019 up 28.88%. With markets having doubled since their pandemic lows, the unemployment rate below 4%, and healthy and elevated demand from U.S. consumers, the Federal Reserve has signaled an intent to begin removing monetary stimulus from the economy, and tightening monetary policy to address inflation and better reflect current economic conditions.
“Stocks coasted higher for much of the past year, repeatedly smashing records,” according to The Wall Street Journal. “But that mentality has shifted in 2022 as the rally lost one of its biggest friends: the Fed keeping interest rates at rock-bottom levels.”
Hiring in 2021 Hits Annual Record
Despite a below trend — with 199,000 jobs added in December — 2021 ended with the most jobs added in a single year ever. More than 6.4 million Americans were hired for the year, and with wages increasing and plentiful job openings, many expect 2022 to be another great year for workers.
The unemployment rate fell to 3.9%, and wages grew at 4.7% annualized, well above previous trends of around 3%. Many economists are pointing to the difficulty in filling positions as one of the primary reasons for disappointing jobs numbers in recent months, rather than a weakening jobs market.
The recent surge in Omicron cases and disruptions to schools, child care and widespread quarantines may also result in uneven hiring numbers through the early months of 2022. A very strong labor market, rising wages, and ongoing difficulty in hiring is one of the key drivers of the Fed’s aggressiveness on easing stimulus.
What Rising Interest Rates May Mean for Markets
While the pivot in monetary policy is based on the good news that the economy is recovering more swiftly than previously expected, many traders are fearful that the Federal Reserve may be behind on raising interest rates and may need to rapidly respond more aggressively in order to tamp down inflation.
Historically, initial interest rate increases do not necessarily spell the immediate end for bull markets, but unpredictability and rapid reversals in monetary policy do tend to rattle markets. At this time, we are encouraging investors to maintain an appropriate context and to zoom out to the long-term time horizon of their investments.
After such a long run higher, markets eventually need to price correct, especially as changes in monetary policy are digested. While -10%+ corrections can be alarming, they happen rather frequently, and long-term investors will experience many corrections over their investing horizon. Our current clients may be familiar with our advice to maintain healthy cash reserves with between 6 to 12 months of spending. This best practice is for just these events, allowing you to avoid the need to sell stocks in volatile markets.
In our view, the underlying market and economic conditions remain moderately healthy. Volatility so far has been consistent with normal recalibration following developments in interest rate policy. Following three great years in a row, in 2022 it will be more important than ever for investors to follow a prudent and measured approach to their investments.
2021 Market Summary
2021 at 36,338, up 5.38% for the month, up 18.73% for the year. The S&P 500 closed December at 4,766, up 4.36% for the month, up 26.89% in 2021. The NASDAQ Composite gained 0.69% in December, up 21.39% for the year. Small-company stocks as measured by the Russell 2000, ended December up 2.11% for the month, up 13.70% year-to-date. Energy (+55.66%) was the best performing sector in 2021.
As your trusted investment management and financial planning firm, New Covenant Trust Company is carefully monitoring potential market volatility, jobs reports and other key economic indicators and will share updates as conditions change. Please don’t hesitate to reach out to us with any questions or concerns by calling 800-858-6127 ext. 6.