The year in brief. 2021 has been a year of economic and commercial recovery – a recovery tempered by the delta variant of the coronavirus but a rebound nonetheless.
In the United States, economic indicators were up significantly this year, some strikingly. As more industries fully opened up in the first half of the year, pent-up consumer demand for goods and services grew rapidly, but supply was unable to keep up in many sectors.
Inflation has made a comeback and analysts were divided over whether it would ease in the near term or persist at high levels. Cheap oil has become a memory, as has cheap gas. Congress has spent much of the year trying to compromise on a multibillion-dollar infrastructure bill, and more recently has begun work on debt limitation and budget legislation. Around the world, supply chain issues and ongoing immunization efforts have tempered global growth.
The American economy. Overall, consumers increased their spending in 2021 and this boosted gross domestic product. The economy grew at an annualized pace of 6.3% in the first quarter, then 6.7% in the second; the Conference Board and the Federal Reserve Bank of Atlanta are forecasting 3.5% and 1.3% of annualized GDP for the third quarter, respectively, given the summer slowdown in the delta variant.
A rush of pent-up money and stimulus payments helped push personal spending up this spring – a record 12.0% jump in the second quarter. Federal spending grew at an annualized pace of 4.2% in the first quarter, also playing a role in this year’s economic recovery.
The unemployment rate has continued to decline from its recent high of 14.7% (April 2020). The Ministry of Labor measured 6.3% unemployment in January; in September, there were only 4.8% unemployed and 7.7 million people unemployed. These figures are still lagging behind February 2020, when there was 3.5% unemployment and 5.7 million people unemployed.
Federal government data showed consumer inflation hit 5.4% in September. The Federal Reserve made no adjustment to benchmark interest rates despite inflationary pressure this year. At its September meeting, however, it decided to gradually reduce its monthly purchases of securities and bonds and end its current economic stimulus campaign in mid-2022. CME Group’s FedWatch tool, a private sector barometer of the likelihood of benchmark interest rate changes, predicts that the central bank will make at least one rate hike by September 2022.
US stock indices performed well in 2021. Heading into Halloween, the Standard & Poor’s Composite Index was up 21% year-to-date.
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The return and principal value of investments fluctuate with changing market conditions. When sold, investments may be worth more or less than their original cost.
The world economy. The International Monetary Fund estimates global GDP at 5.9% for 2021, followed by a 4.9% expansion next year. Among its growth forecasts by country for 2022: 5.2% for the United States, 5.6% for China, 4.3% for the euro zone.
Manufacturing slowdowns and trade issues related to the pandemic have rocked the Chinese economy this summer. The official estimate of the Republic’s GDP in the third quarter was 4.9%, down from the annual growth rate of 7.9% in the second quarter. The same problems plagued the eurozone, where inflation hit a 13-year high in September.
Global demand for oil has strengthened this year as key economies regained full steam. An oil rally gathered pace, pushing the price of WTI crude above $ 84 at the end of October (a seven-year high). The price of Brent crude, the global benchmark, simultaneously exceeded $ 86 (a three-year high). Retail gas prices also increased in 2021.
MSCI’s EAFE Index, which tracks the performance of international stock indices, rose about 9% for the year as Halloween approached. Among the major foreign indexes, India’s Nifty 50 and Sensex were leading this fall, with YTD gains approaching 30%. Brazil’s Bovespa has been the worst performer among the consequential indices, falling almost 11% since the start of October.
MSCI EAFE is an unmanaged index that tracks developed foreign equity markets. Sensex of India and Bovespa of Brazil are considered representative of their respective markets. Individuals cannot invest directly in unmanaged indices. Past performance is no guarantee of future results.
International investments involve additional risks, including differences in financial reporting standards, exchange rates, political risks specific to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors can lead to greater volatility in stock prices.
Look back, look ahead. In the fourth quarter, investors saw what could be a very good earnings season. As of Oct. 22, 23% of S&P 500 member companies had released their third quarter results, with the S&P 500 blended earnings growth rate of 32.7%, according to market analysis firm FactSet. The combined profit growth rate combines actual results for companies that have published and estimated results for companies that have not yet published.
If that percentage holds, it will be the third year-on-year earnings growth rate for the index since 2010. What worries Wall Street are forecasts. Businesses are facing higher costs than a year or two ago, some due to inflation, others to supply chain disruptions and COVID-19; this could hurt 2022 profits.
The inflationary pressure we see now could linger until 2022. Less Fed bond purchases mean less liquidity in financial markets – and a rate hike could take place next year.
Some analysts are concerned about these factors and their possible impact on stocks, but overall the Federal Reserve is forecasting 3.8% growth for the economy in 2022. If that turns out to be true, it would be the second best GDP figure since 2004.
Consumer spending, the housing market and the labor market all appear to have gained momentum and may continue to be so strong until 2022.
As a reminder, fall and winter can be volatile on Wall Street, and short-term volatility doesn’t always warrant a reaction. Experienced investors with a long-term view know that volatility is part of the investment process, and investors with a shorter time horizon should consider their risk tolerance and overall investment goals.
On the way to a wonderful year 2022.
This information should not be interpreted by a client or potential client as the provision of personalized investment advice. All investments and investment strategies have the potential for profit or loss, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed in this document, will be profitable or will equal historical performance levels. Investment strategies such as asset allocation, diversification or rebalancing do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. Any benchmark benchmark is not a prediction or projection of actual investment results and there can be no assurance that a target will be achieved.
Stacy Bush works for Bush Wealth Management.