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Final 2021 Thoughts and Our Belief in 2022

| January 10, 2022
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Many are happy to see 2021 go. Investors saw a lot of back and forth last year. Some might even have whiplash.

They didn’t have to worry much during a traditionally muted and light holiday trading period:

There isn’t much data yet for this year. Also, the Big Money Index (BMI) from MAPsignals, which measures institutional investor activity, started 2022 right around 50%, which is a nice baseline to work from:

Without trying to be funny, the situation basically is this: not much is happening and we’re starting at middle ground. So, we’re taking this opportunity to do a quick final review 2021 and set the table for 2022.

As I mentioned, many folks are probably happy to let 2021 go. It was another odd pandemic year. We had variants, restrictions, people undoubtedly suffered losses. At the same time, we made incredible progress against COVID-19 with vaccines and therapeutics, while life also nudged a bit closer to “normal.” We investors likely are pleased with 2021’s returns too.

Perhaps one day the perception of 2021 being a horrible, no-good year will change. And while it was a good year for stocks, some interesting things took place beneath the surface.

For instance, we saw a distinct disparity among just a few stocks. At the end of 2021, the largest seven stocks had a total market cap of almost $12 trillion. That means just seven of the S&P 500’s stocks (1.4%) accounted for about 30% of the capitalization-weighted index’s value:

The S&P 500 was up 26.89% for the year, despite enormous volatility and regular sector churning, because only a handful of stocks provided stability.

Knowing where the market stability came from, we can look at Big Money stock buying for the entire year and actually see the money pulsing in and out. If you look at the below chart on the left, buy and sell signals are superimposed over the S&P 500 (which includes the market weight of those seven stocks). You see a consistent upward trend. On the right, the buys and sells are superimposed over the iShares Russell 2000 ETF (IWM), which tracks the Russell 2000. In that chart you can see much more volatility under the surface:

These charts are proof of the consistent mean reversions that occurred in 2021.

Our friends at MAPsignals conducted an interesting analysis comparing 2021 to another strong year for stocks, 2017 (though that year had a much stronger upward trend in general). In the next two charts, you can see how 2017 had ebbs and flows like last year, but there was a lot more overall buying (the blue bars are bigger in 2017 than in 2021):

The main takeaway is this: while 2021 looked great on the surface, underneath we know the market buoyancy came from just seven huge stocks. Contrast that against 2017, which also had big returns, but was a “truer” bull market in that there were broad-based gains on big overall volumes.

In other words, a real bull market is more than just seven stocks. There was a genuine growth engine in 2017. Stocks big and small (especially growth stocks) saw gains. But not in 2021.

But don’t worry. This year a broad-based growth run – a “true” bull market, if you will – could take place.

Seven Reasons to Believe in 2022

Before we start, we recognize there are real problems we'll have to contend with this year that include all sorts of issues. And of course, let’s also include the caveat that the market has a crazy way of doing the opposite of what's expected.

But even with all that said, we believe in 2022 and think we’ll experience broad-based growth.

A big reason for this belief is we think the winds of change are blowing after two years of unprecedented government actions pushing markets. This year, we think long-term fundamentals will reassert themselves as the most important drivers of economic and financial performance, meaning that quality will matter more than ever.

So, in honor of 2021’s seven market-lifting stocks, here are seven primary reasons we believe in 2022.

COVID-19

The virus and its related rules should have much less influence on our lives 12 months from now than they do today. While cases are at record highs, thankfully, hospitalizations and deaths aren’t even close:

Federal gridlock

It appears President Biden’s Build Back Better (BBB) plan, which would increase taxes and spending, is mired in D.C. muck. The rest of us see this as “peak D.C.,” as in this is just what they do. If you put yourself in the shoes of moderate Democrats in Congress, being forced to vote on tax hikes in an election year is astronomically difficult. And their reluctance will continue to grow every week, which will probably create additional gridlock on any BBB proposals. 

Midterm election

The midterm election in November could drastically limit the ability of the current administration to get much done in 2023 and 2024. That would mean no more tax hikes and that legislation would have to be bipartisan to pass. That likely means more GRIDLOCK, which markets like:

Economic “contests”

We expect three economic forces to compete in 2022 – waning fiscal relief, rising employment, and healing supply chains. While the excess demand from massive government spending will decline in 2022, employment and wages should rise as supply chains continue to heal.

Interest rates

The Federal Reserve has a big job ahead. Its most recent “dot plot,” which is a summary of the Fed’s expectations for future interest rates, suggests three rate hikes to come. However, given the current administration’s inclusion of more “doves” in the Fed, we’ll take the under and say the federal funds rate will only increase twice this year. From a pure market valuation standpoint, two hikes versus three is a good thing.

Profits

Monitoring profits, which are at an all-time high, will be critical. Remember, some of the recent strong corporate results are due to temporary spending blowouts. But with more jobs and lower unemployment, we expect profit growth of 10% or more in 2022. That’s below the 2021 level, but double-digit gains across the board are always positive.

Wild card risks

Will China invade Taiwan? Will Russia invade Ukraine? We think the former is extremely unlikely and the latter is completely unknown unless your name is Vladimir Putin. Either event could cause a temporary selloff, but neither would change the fundamentals. Thus, they’re short-term risks at worst. Of course, we also don’t know what we don’t know. Who predicted Turkey’s currency crisis, China’s corporate crackdown, commodity fluctuations, and so on? Unanticipated events will occur (maybe even Black Swans). Yet, we believe in our ability to persevere.

Remember, the phrase, “Change is the only constant,” rings true. For example, let's look back at the top S&P 500 sectors for 2021:

In essence, every quarter was different.

Change will happen and we don’t know what it will be. So, the best way to navigate this uncertainty, which occurs every year, is to have a well-diversified approach with a goals based plan foundation stick to it.

Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.

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