The year 2021 certainly had its ups and downs. While we championed multiple vaccines to tackle COVID, it continued to spread around the globe in different variations causing the deaths of 5.4 million people in the last two years.[i] Our ability to cope with the pandemic allowed global economies to reopen as we assumed vaccines and treatments would allow us to safely return to normal activities and put the pandemic behind us. And yet, as we write this review in early 2022, we are still challenged by the virus.
We look back at an eventful year in the markets and the economy to remind us how far we have come, and that our journey with COVID is not over.
In 2021, we were all reacquainted with, or introduced to, phrases like: supply chain disruptions, don’t fight the Fed, bond tapering, COVID variants, vax boosters, space tourism, metaverse, and Superbowl Champion Tom Brady. We were also reminded that markets don’t reflect real-time economic conditions. They begin to recover far earlier than the economies they reflect. Markets are forward looking, discounting mechanisms and tend to price in what may happen 6-12 months ahead. The Fed and government stimulus that buoyed individuals and businesses for the past 21 months created a “risk-on” type of market trading mentality.
EQUITIES: Another Strong Year
The S&P 500 had a stellar year, rising 28.7% when including dividends. The index posted 70 record highs, the most in one year since 1995 when it posted 77 new market highs. For the first time since 2005, the S&P 500 outperformed the tech-heavy NASDAQ Composite and the Dow Jones Industrial Average. Keep in mind that this performance had been led in large part by the performance of the 10 largest companies in the S&P 500, which make up 30% of the index’s market capitalization.
The energy sector of the S&P 500 was the clear winner, up nearly 55% for the year, while financials and technology also had a great year with 35% returns. Rising oil demand from reopening, supply chain concerns, and OPEC supply policy led to increased energy costs in 2021 and oil topped a 7-year high of $84.65/bbl. Financials benefited from loose monetary policy, increased spending, and high rates of savings. Additionally, banks that set aside billions of dollars in 2020 to shield from high default rates were able to put large amounts of cash to work in 2021 when the worst outcome did not come to fruition. Although technology stocks fell out of favor in the very end of the year, the COVID pandemic initiated what is expected to be a new wave of innovation in electric vehicles, cybersecurity, 5G, augmented virtual reality and E-sports, to name a few.
Sector Performance (Ranked by 2021 Return)
More proof of the risk-on mentality of the markets in 2021 was the number of SPAC deals. Over 566 Special Purpose Acquisition Companies (SPACs) came to market in 2021. To put that in perspective, the number of SPAC deals in past years were as follows:
The amount of money raised for initial public offerings (IPOs) in 2021 also broke records. These companies took advantage of risk seeking investors as well as high saving rates. However, as investors began to expect higher interest rates, their appetite for risky assets fell. By the end of the year, only 34% of stocks that had IPO’d in the year were above their IPO prices.[i] Notable IPOs through the year were Oatly, Didi, Coinbase, Warby Parker, Robinhood, Toast, and Rivian.
The U.S. equity markets outperformed the rest of the world in 2021. After a great year for China in 2020, China underperformed due to slowing growth, property sector concerns, and tightening government regulation. Since China makes up more than a third of most emerging market indexes, the MSCI EM missed out on the global rally and fell 2.5% for the year.
The Treasury Inflation Protected Securities (TIPS) sector led performance of all fixed income asset classes up 6.0% for the year. Municipal bonds also had positive total returns because of the looming possibility that tax rates would increase and there would be more stimulus to state governments. Tax-exempt issuance for all of 2021 came in at $343 billion, which was up 4% from 2020, according to Gannet Welsh & Kotler (GW&K) Investment Management, a municipal bond firm. Munis proved to be a resilient bond category in 2021 as better than expected revenues from state and local governments combined with direct federal aid helped improve credit fundamentals for a vast majority of the market.
2021 Bond Returns by Asset Class
Of the high-grade bond sector, U.S. Treasury bonds were the worst performing. Corporate bonds outperformed government bonds due to strong balance sheets, improved business performance, and a promising outlook for the economy.[i] Corporate bonds were viewed as a safe, attractive alternative to government bonds last year.
Sandy Cove’s focus has always been on ensuring quality in fixed income, rather than stretching out the risk curve to achieve higher potential returns. We have selected our bond managers based on the premise that capital preservation is the primary goal with this asset class, and appreciation is secondary.
Sandy Cove’s Repositioning in 2021
Given the volatile year and unprecedented economic, market, and government moves that occurred, our Investment Committee met multiple times to ensure client portfolios were positioned to first, protect principal, and second to grow in a risk-adjusted manner. We discussed the most important attributes of portfolio construction during a downturn, for example, cash being “king”, quality shines through, and strong leadership is critical. We were also aware that tough times do lead to better times and there is a time to play defense and a time to play offense. Out of those discussions came actions which we put into practice in 2021 and communicated to our clients throughout the year.
In general, we made the following rebalancing moves during 2021:
- Shortened duration in our fixed income portfolio to lessen our exposure to interest rate risk
- Added an inflation protection allocation as we believed inflation would be more than “transitory”
- Moved more clients to individual municipal bond portfolios, benefitting from preferential tax treatment
How were Sandy Cove’s 2021 Market Assumptions?
Last January, we stood at a point of a rapidly recovering stock market and a lagging economy that longed for a COVID cure. It was then that we gave our best educated outlook on what we thought the market themes of 2021 would produce. We pegged a few themes correctly. Equities did have a better year than fixed income, municipal bonds were a better investment than Treasuries, and higher GDP was driven, in part, by government stimulus and pent-up demand. We underestimated the rebound in real estate in 2021, but we are still a bit worried about lease-up fundamentals in the next 3-5 years, especially in urban, office settings. We expected more modest equity returns in 2021 after a strong 2020, but the market had other ideas and surprised many of us investment professionals with its continued march upward.
In 2021 we witnessed a year of consecutive market records that some did not think we could achieve in such a challenging economic environment. Vaccines were in their nascency, multiples on earnings were relatively high, and the mention of inflation gave us flashbacks to the 80s—for better or worse. It’s times like these, when Sandy Cove Advisors can be helpful to filter out the noise and keep the focus on the long-term investment returns for our clients so they can achieve their goals. It has been a roller-coaster of major events these past few years, but growth assets performed very well during that time. We’re happy that, with our stewardship, our clients never lost focus to the benefits of staying fully invested.
Reviewing the events of 2021 provides the backdrop and perspective on our thoughts and outlook for 2022. We hope you will enjoy reading our market outlook for 2022 which can be accessed here: 2022 Market Outlook: Year of Fiscal Tightening
We wish you all a healthy and prosperous new year. As always, if you have any comments or questions, please feel free to reach out to us.