December In Review
December closed off a wild year for investors; while cryptocurrency, meme stocks, SPAC’s and IPOs captured much of the headlines, we prefer to concentrate on the mainstream, and we will confine our commentary to the significant stock and bond indices. For stocks, it was the third year in a row that global equities, as measured by the FTSE All-World Share Index, delivered double-digit returns, with the index gaining 16.7% in 2021, but fixed-income investors were not as fortunate. Inflation-protected note ETF’s (TIPS) returned nearly 6%, while High Yield Bond ETFs gained just under 4%, but most bonds lost ground last year as yields moved modestly higher.
December closed off a wild year for investors; while cryptocurrency, meme stocks, SPAC’s and IPOs captured much of the headlines, we prefer to concentrate on the mainstream, and we will confine our commentary to the significant stock and bond indices. For stocks, it was the third year in a row that global equities, as measured by the FTSE All-World Share Index, delivered double-digit returns, with the index gaining 16.7% in 2021, but fixed-income investors were not as fortunate. Inflation-protected note ETF’s (TIPS) returned nearly 6%, while High Yield Bond ETFs gained just under 4%, but most bonds lost ground last year as yields moved modestly higher. Higher coupon rates and tighter credit spreads helped High Yield and Senior Loans overcome the duration headwind from higher rates (Private Debt also provided superior returns for those investors able to gain access), but Government Bonds and Investment Grade Corporate Bonds were not able to keep up and ended 2021 in the red. A strong US dollar and wider credit spreads hurt Emerging Market debt even more.
Overall, the composition of the S&P 500 has increasingly concentrated on a smaller and smaller group of names; according to JP Morgan, the top 20 firms in the S&P 500 comprise about 43% of the index, while the top five firms make up nearly a quarter. Not only does this make the fortunes of the S&P 500 highly dependent on a small group of stocks, but it also inflates its valuation. CIBC states that if the seven-largest companies in the S&P 500 were excluded from its valuation calculation, the forward P/E ratio would fall from 21 to 18.6 times. Big cap US stocks are expensive versus small-cap, value, and most international stock indices, but the S&P 500’s market cap concentration in a small group of highly valued stocks makes it appear even more so.
Declining market breadth, where fewer and fewer market leaders are driving the overall index returns higher, has historically proved to be a red flag for investors: these market leaders become the last men standing until they too topple over. Alternatively, we could see cheaper, cyclical stocks that trailed the previous year and currently trade at much more reasonable valuations start to catch up. The declining breadth of last year may become the fuel for returns in 2022, this disparity in outlook is evident in the range of Strategas estimated returns for 2022.
