Much like the dumpster fire that was 2020, 2021 is a year I can’t wait to relegate to the history books. In addition to the pandemic, social unrest, deficit spending, and a weak economy that was carried over from the previous year, we now have high inflation.
And just when we thought COVID was under control, we got hit with the one-two variant punch of delta and omicron. Our politics remain in Dysfunction Junction to the point that even a global pandemic became political football. But here’s the funny thing: Just like in 2020, the stock market loved all the chaos.
U.S. stocks gained 25.7% in 2021, which is even higher than 2020’s return of 21.1%. The explanations I heard last year for the raging bull were that COVID would soon be under control, and falling interest rates lowered the discount rate of the stock market cash flows. If that were true, this year’s COVID resurgence and rising interest rates should have caused a grizzly bear.
|VTI||Vanguard Total Stock Market ETF||25.7%|
|VXUS||Vanguard Total International Stock ETF||9.0%|
|BND||Vanguard Total Bond Market ETF||-1.9%|
|VNQ||Vanguard Real Estate ETF||40.5%|
|GDX||Van Eck Vectors Gold Miners ETF||-9.5%|
Again, just like last year (and most of the past dozen years), international stocks badly lagged those of the U.S., clocking in only a 9.0% return. International equities nearly matched those in the U.S. for the first part of the year, but then went nowhere.
Where’s The Bear?
Perhaps the grizzly spent the year in quarantine, as U.S. stocks steadily gained all year long. If it didn’t seem like the steady chart below, that’s because of sensational headlines like “Stocks Plunge Again.” In reality, I’m not sure I’ve ever seen a more boring and steady bull.
(For a larger view, click on the image above)
But the broader stock market is where the comparison to 2020 ended. REITS, precious metals and mining stocks, and bonds all had reversals of fortune.
REITS, which lost 4.7% in 2020, surged 40.5% in 2021. So much for brick-and-mortar retail being dead. The same goes for office space becoming obsolete, as the new normal would have so many of us working from home going forward. The logic that seemed so sound was proven wrong.
Precious metals and mining stocks also did an about-face. Last year’s 23.7% gain for the Van Eck Gold Miner ETF (GDX) did not continue into 2021, with the fund losing 9.5%. As volatile as GDX seemed, it was actually a pretty boring year for this unsteady asset class. Perhaps Bitcoin and other crypto currencies are the new gold? Bitcoin gained 60% after gaining more than 300% in 2020.
Bonds, which gained 7.7% in 2020, lost about 1.9% in 2021. The year started out bleak, with the Vanguard Total Bond Market ETF (BND) losing almost 4% in the first quarter as rates nearly doubled and the 10-year T-bond yield surged from 0.93% to 1.74%. But then, as many thought they were finally right in predicting a bond bubble, rates fell to 1.52% by Dec. 31.
It’s still significantly below the 1.92% yield seen on Dec. 31, 2019. For those who are sure that inflation and interest rates will go up as we print more money, consider that Japan has been printing more money for three decades while fighting deflation.
The case for REITS and precious metals is based on lower correlations to U.S. stocks. But picking narrower pieces of the market is mostly speculation, rather than investing. Cathie Wood’s growth-oriented ARK Innovation Fund (ARKK) gained 152.8% in 2020, yet after attracting far more assets, is down 23.6% in 2021. On the other hand, though the iShares MSCI USA Value Factor ETF (VLUE) lost 0.24% in 2020, it gained 28.9% in 2021.
Let’s face it—we can’t even explain the past. I’d love to hear an explanation as to why U.S. stocks have surged 52% over the past two years. Just think how futile it is to predict the future.
What will happen in 2022?
- Will stocks continue to surge?
- Will value beat growth?
- Will international stocks finally outperform the U.S.?
- Will inflation stay high?
- Will interest rates increase?
The bottom line is that I don’t know, so I build a portfolio of broad index funds that own value, growth and core stocks that also provide some long-run inflation protection. On bonds, I keep credit quality high and duration moderate.
But one key lesson is that if the last two years have been so horrific and stocks surged, don’t exclude the possibility that the next two years could be great economically, yet stocks could plunge.
Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for Barrons, AARP, Advisor Perspectives and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.