In 2021, a tumultuous pandemic-plagued year, the Dow Jones Industrial Average and S&P 500 stock index hit all-time highs on Dec. 29. The tech-heavy Nasdaq index recorded its all-time high on Nov. 19. Looking back to January 2021, midst the turmoil that broke out over the election, COVID-19, government imposed restrictions in the name of health, would you have predicted such outsized performance?
For a visual tracking of the performance of the S&P 500 index, see bigcharts.marketwatch.com. Plug in the symbol for the index (SPX) and look at the pattern of performance over the course of 2021. Notice the fluctuation in the 4th quarter as rising inflation, delta and omicron, forecasts of rising interest rates, increased bellicosity on the part of Russia and China, and falling performance ratings for the president and VP, made for increased daily trading volatility despite the record-setting result. Is 4th quarter volatility illustrative of what may come?
One of the greatest market forecasts of all time has been attributed to a conversation that Henry Poor, founder of the financial analysis firm Standard & P00r’s, had with John D. Rockefeller in 1927. Asked about the performance of the stocks of the Standard Oil Companies, Rockefeller profoundly opined, “I think they will fluctuate.”
Later, various versions of Rockefeller’s astute perspective entered the forecasting lexicon. When a gentleman asked about the course of the stock market, the great financier, J.P. Morgan said, “Young man, I believe the market is going to fluctuate.”
In 1939, Time magazine quoted the lauded financial journalist, Sylvia Porter, who when asked about the short-term outlook for the market, crisply responded, “The stock market, sir, will fluctuate.” (Thanks to quoteinvestigator.com for the history of these storied quotes).
Will the market fluctuate going forward? Yes.
In past columns, this writer suggested that you regard all forecasts merely as entertainment. Financial historian Peter L. Bernstein instructed, “Forecasts create the mirage that the future is knowable.” Surprises and the Law of Unintended Consequences will continue to plague market strategists, forecasters, political leaders, yourself and your family, complicating financial life planning decisions.
We ended 2021 experiencing a major jump in inflation. A visit to the grocery store and the gas pump brings home the reality that your earned and saved dollars are shrinking in buying power. What’s behind the inflationary surge?
Economist Milton Friedman (1912-2006) received the 1976 Nobel Prize in Economic Sciences for his research on consumption, monetary history and the complexity of price stabilization policy. Despite current political obfuscation about greedy corporations and supply chain snafus, Friedman stated, “Inflation is always a monetary problem.”
Inflation means that take-home pay and savings buy less. Costs of goods and services continue to rise, often at accelerating rates as inflationary pressures take hold. During the early days of the pandemic, the Federal Reserve Bank continued to hold interest rates at rock bottom lows while the financial system was flooded with money, including pandemic relief funds. During lockdowns, people had fewer places to spend money, so they saved it. Analyst Paul Mampilly, in a December 2021 newsletter (Profit’s Unlimited), reported that total U.S. money market assets sat at a record $4.6 trillion at the end of 2021. In money market accounts at brokerage firms alone, “retail investors, a.k.a. Main Street investors, are sitting on $1.4 trillion in cash. This cash is seen as ‘dry powder’ just waiting to be infused into the stock market.”
Money poured into equities in 2021, some in mad speculation. Witness the manic ups-and-downs of “meme stocks,” shares of companies like Game Stop that gained cult-like followings online and through social media platforms. People bought cars, boats, homes, appliances, computer and other electronic equipment, renovated existing homes, resumed travel, etc. With factories closed due to COVID and worker shortages, and surges in demand after lockdowns, we “broke all the supply chains.” Channeling Milton Friedman, inflation pure and simple is a function of “too much money chasing too few goods.”
With inflation at a 39-year high at the end of 2021, are we facing Jimmy Carter era surges? We don’t know. We do know the Fed will be increasing interest rates, which Mr. Market and bond buyers don’t relish. Yet with ample buying power still out there, market rallies easily could follow any slump.
Your response to changing tides is based on your ability to swim, financially and otherwise. An early-in-the-year visit with your financial adviser is advised. With coronavirus variants a fact of life, physical fitness and overall health is key to prosperity in that “healthcare is wealthcare.”
Opportunities for investment in innovation and the rebuilding of America’s supply chain and transportation system will abound. The top performing sectors in the S&P 500 index in 2021 were energy, real estate, technology, and financials. Financial firepower is on the sidelines ready to fuel creativity. Year 2022 most certainly will be challenging and interesting. And the market will fluctuate.