For a year that started on such an optimistic note, 2021 ended oddly. Early in the year, with the vaccine for COVID seemingly ready to be approached by governments worldwide and unprecedented support from the Fed buoying asset prices, it seemed a somewhat back to normal business environment and a roaring comeback we’re on their way.
Then came Delta in the middle of the year and we ended with Omicron. The virus variants are seeming to defy our expectations at every turn. Even upending the life of Cash Chronicles author, sidelining me for much of last week, and closing travel and business for many. Along the way this year, we saw the meme stock craze, which introduced monikers like “Roaring Kitty”, saw random shitcoins and jpegs make millionaires out of teens and experienced the effects of a supply chain crunch and accelerating inflation.
What struck me the most about this year is 1. How predictable we assume life to be, when it is most definitely not and 2. How much we base our expectations for the future on the recent past.
If there is any lesson to take away from the experience of a wild year like 2021, it’s that looking at the recent past to predict the future is fraught with danger. It helps to think of where we ended 2020 and how that shaped how we would look at 2021 to see how much things have changed. This is a useful exercise especially for investors, as it allows us to review our frame of mind and the information used when making investment decisions.
How it Started and How it Went
2020 ended with a spectacular rally in cyclical stocks and losses in the safety of government bonds. After a downward turn in October from the summer rally, the S&P 500 went on a 15% tear to finish out the year. All sectors saw a lift including tech which finished the year up 85% from its pandemic low in March 2020. This was on the back of news that Pfizer and other drug makers had a breakthrough vaccine with high efficacy.
Market strategists and professional investors saw this as a time to shine for risk given the prospect of reopening. I shared this sentiment and recommended overweighting sectors such as cyclicals, emerging markets and even foreign developed markets like the UK.
Yet subsequent events complicated these calls. Emerging markets started out of the gates with massive returns only to fall back on a strengthened dollar and creaking health systems in developing countries. Cyclicals bounced along from their strong start as well as it became clear that vaccine skepticism was allowing the virus and closures to fester.
Other themes started to creep in as well. Lockdowns and travel bans upended delicate supply chains. The system that kept prices for things like computers and appliances falling for years suddenly was thrown into reverse and certain items like used cars saw their prices skyrocket.
The UK and Europe in particular struggled to emerge from lockdowns. Although markets were supported by the ECB and other regional central banks, they failed to produce as strong of a momentum than was seen in the U.S., lifting markets to dizzying heights.
Finally, one can’t talk about investment in the US in 2021 without mentioning the upswing that probably took most by surprise: the housing market. A massive shift took place as low rates and mobile professionals descended upon suburbs and exurbs of large metropolitan areas to buy up homes. Although much of the media focuses on absolute home price rises, keep in mind many people are leveraged up on their homes with mortgages. A 20% rise in prices can produce a 100% return on investment in a home with 80% loan to value.
How Things Turned Out
So given expectations of the markets and how things turned out, I thought it would be interesting to see how different segments of the market actually performed versus expectations.
US Equity Markets – Breaking down the S&P 500, which saw a 27.4% return for the year overall, into its different sectors, the top 5 performers for the year were the following:
1. Energy – 49.3%
2. Real Estate – 40.8%
3. IT – 34.8%
4. Financials – 33.2%
5. Consumer Discretionary/Materials – 24.3%
IT and Consumer Discretionary were probably expected as they had great runs in 2020 but many may be surprised to see that the real estate sector actually outperformed even the tech sector. Financials were another unexpected well performing sector, especially given the rate environment. Within the financial segment, brokerages saw the biggest gains, not surprising considering that meme stocks and crypto helped bring up commissions at many of these firms.
Top Performing Stocks – Speaking of meme stocks, the meme stock craze took hold in early 2020 so it’s no surprise that GameStop ended up as the top performing stock. Yet fintech, pharma and energy rounded out the top 5 performing stocks, all of which likely did not start the year high on many investor radars.
1. GameStop – 815%
2. Upstart Holdings – 321%
3. Moderna Inc – 193.6%
4. Devon Energy – 175.3%
5. Continental Resources- 167.1%
Crypto – My crypto skepticism is somewhat well known, however it’s returns can be ignored when summarizing investing in 2021. The fact that esoteric coins could produce such wild returns is likely what attracted so many novices to the space to try their luck. Will returns like these be repeated in 2022? Maybe they will and maybe the won’t, anyone that tells you they know shouldn’t be trusted because they are purely speculative investments. That being said, here are the top 5 returns in crypto for 2021:
1. Shiba Inu- 42,700,000%
2. Polygon – 11,800%
3. Solana – 10,800%
4. Terra (Luna) 10,300%
5. Dogecoin – 3400%
International Markets – US investing as all the rage right now, especially when returns are trouncing those found in the rest of the world. It pays to keep our eye on performance outside the US however as outperformance at home can’t last forever. These were the top 5 performing national stock markets for 2021 globally (in USD):
1. UAE – 45.1%
2. Saudi Arabia – 34.2%
3. USA – 29.0% (as of the 30th)
4. Austria – 31.4%
5. Taiwan – 26.8%
There should be a special mention here for India which grew 24% year over year as well as for China, which is heading towards a bear market with a fall of almost 20% on the year.
The crackdown on private business from the Chinese government reminded investors that political risk matters. Despite all the innovation and booming growth in China, anything that seemed to hint at attention or soft power that could rival that of the Chinese government was swiftly stamped out like it was free speech in Hong Kong in 2021.
Political freedom as well as economic freedom matters in the long run. It’s likely one reason that investors tend to gravitate towards more open and free societies in the long run. Don’t believe this is true? The US has had one of the best performing stock markets since the financial crisis in 2008-2009 but do you know what country was the runner up? If we expand that timeline to 20 years and look back to see what stock market has done the best over the past 20 years, who do you think would have done the best?
The answer is India. India’s BSE Sensex has almost matched the return of the S&P 500 since the lows of March 2009 as seen below.
If we zoom out to 20 years though, we can see that the Indian stock market trounced every major market globally since January 1, 2000, returning 968% over the period. This works out to an annual return of 12.6%.
If we think about it intuitively it makes sense. India ride the emerging market boom of the early 2000’s and has a critical mass of tech companies linked to the U.S. to be able to benefit from the recovery there and the tech rally that ensued since 2015. Despite its reputation as a country full of red tape, this still seems to work better for its markets than the precocious crackdowns that can randomly come from a one party state like that of China.
Evaluating My Own Calls
As for my calls which I had made early in the year, some worked out and some didn’t.
I made a call on small and mid cap cyclicals early. These started well but ended up lagging large caps through year end.
Likewise for UK shares, although the market had its best performance since 2016 with a 14% return and Sterling doing well against the dollar. It wasn’t enough to beat the 28% return of the S&P.
Emerging markets were the biggest flop. Due to the Chinese crackdown and COVID raging in much of the emerging world, the MSCI Emerging Market Index ended down 5% on the year.
My bet which turned out to do well was real estate, both privately and through REITs. As we saw above only the energy sector beat out real estate and the sector lifted much of my lagging performance from other parts of my portfolio.
Finally, I did catch a case of FOMO and decided to throw in my lot with tech to catch up for 2021. I ended up taking exposure to the Nasdaq 100 and making some quick profits by selling down for cash flow reasons in October.
What 2022 Holds
For those of us that lived and especially invested, during the dot com bubble of the late 90’s and 2000, we know this bubble market will not last forever. It’s anyone’s guess as to whether markets will continue on the pace they have been at for the last 2 years, flatline or fall but either way as prices outpace earnings, the likelihood of a pullback becomes greater.
Let’s take the S&P 500 as an example, despite the fact that earnings have increased 50% since the end of 2016, prices have increased over 100% since then.
Meanwhile prices:
Pricing would have to correct by almost 30% from the current level just to align with the valuation seen in 2017. It doesn’t mean this will happen in 2022 but the more prices rise above earnings, the likelier a pullback becomes.
And the fallout of such a pullback would be even more dramatic than in the dot com bubble because the bubble has spread wider and further this time. Stocks will be the canary in the coal mine for a downturn. I expect prices to also fall in other risk assets such as crypto and NFT’s, even the housing market could cool off.
So despite the onslaught of negative headlines, enjoy this time of high asset prices and plentiful jobs, none of these are promised for our future. However you choose to position your investments given the current outlook, know that the market will always have some surprises up its sleeve.
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