The year was one of tumult for most economies as growth concerns, geopolitical conflicts, and inflationary pressures weighed heavily across the globe. 2022 opened with ongoing supply chain and production disruptions from the Covid pandemic which were sharply worsened by the February invasion of Ukraine by Russia. The Ukrainian conflict also led to a sharp increase in already elevated energy prices. This rise in petroleum prices was a major component of the surge in global inflation experienced during the year that in turn triggered aggressive monetary tightening by most of the world’s central banks.
2022 has been an extremely challenging year for both the U.S. and the global economy as the Covid pandemic and the Russian invasion of Ukraine have disrupted global production. The OECD is currently estimating that Russia’s invasion will cost the global economy $2.8 trillion in lost output by the end of next year, and potentially more if a cold winter leads to energy rationing in Europe. Additionally, the organization just slashed its projection for global growth in 2023 to just 2.2%, down from its prior forecast of 2.8%. It predicts Europe’s economy will be hit the hardest, but even US growth is now projected to be a mere 0.5% next year.
After a mixed but relatively flat first quarter, the market’s wheels fully fell off the bus in the second quarter as the markets sharply weakened with a broad selloff in stocks, bonds, and cryptocurrencies. Following three consecutive years of appreciable stock gains, the market closed out the first half of 2022 with the S&P 500 down ~20% and the Russell 1000 Value, Dumaine’s benchmark, down almost 13%. The specter of an economic downturn contributed to the market’s worst first-half year in 50 years. In fact, investors have seemingly lost their appetite for risk in recent months as value stocks are on pace to outperform growth stocks for the first time in years.
As we started 2022, the markets were focused on how global central banks, including the U.S. Federal Reserve, were going to address elevated inflationary levels and ongoing supply chain issues. Outside of Russia’s Putin, no one would have thought that by mid-quarter, the world’s attention would shift dramatically to the unprovoked invasion of Ukraine. While horrific in its own right, the invasion further exacerbated inflationary pressures – oil prices initially spiked by 30%+ and food prices soared as Russia and Ukraine collectively provide 20-30% of all global wheat and corn exports.
When looking back on 2021, the financial markets seem like a blur. Despite the year’s turmoil, the U.S. markets still posted strong double-digit returns. The S&P Index returned 28.7% for the year, while Dumaine’s stock benchmark, the Russell 1000 Value, advanced almost as much with a 25.2% gain. The year started with the market-leading technology stocks, known as the FAANGM, trading at record highs with world hopes that several new vaccines would quickly reduce or even eliminate COVID … Wall Street’s surge was largely driven by 2020’s $1.9 trillion Federal fiscal stimulus package and the initial belief that the COVID vaccine rollout in the U.S. was going well.
The third quarter of 2021 was a roller coaster with elevated inflation fears, talks of reduced monetary easing, supply chain bottlenecks, higher energy prices, and rising interest rates. As a result, the market’s fear gauge climbed by almost 50% during the quarter. When coupled with a fourth wave of COVID, which is only now abating, slightly slower U.S. economic growth is now projected. To make matters more unpredictable, concerns have risen regarding systemic risk to the global economy from China’s quickly unfolding real estate crisis.
As the economy continued its post-COVID recovery, the end of the second quarter marked the end of one of the best first half-years in the market since 1998. The market and the economy continue to reap the benefits of the pandemic recovery from the COVID recession as new cases of coronavirus keep falling, people continue receiving vaccinations, and economic growth keeps rising. April began with heighted fears of inflation driven by $386 billion in new stimulus payments along with $2 trillion in extra savings that were socked away during the pandemic. Investors hoped that these funds would be spent gradually so that American businesses would be able to readily meet growing demand. Instead, supply bottlenecks and unexpectedly robust inflation have occurred as Americans embrace moving beyond the nation’s lockdown, reuniting with family and friends, and starting to go out and travel.
The first quarter’s end marked the best 12 months in the history of the S&P 500. After hitting bottom at the onset of the COVID pandemic, the broader market rallied more than 70% with the average stock almost doubling during this time period. Even the Russell 1000 Value, which does not typically include growth stocks, showed remarkable strength in the last year as it advanced more than 54% since last March. Through the first quarter of 2021, Wall Street has continued its year-long surge with the Russell 1000 Value dominating as it increased by more than 11% since January 1st while the S&P 500 only gained 6.2%. The Nasdaq, which was 2020’s strongest performer with a 45% return, is up only a meager 2% year-to-date.
2020 is a year almost all were glad to say goodbye to. However, most investors felt quite the opposite as the U.S. financial markets hit all-time highs: the S&P 500 advanced almost 17% and the NASDAQ, led by the FANGM stocks, returned an astonishing 44%. On balance, we believe a more bullish outcome is likely for 2021 as the markets by definition are forward, rather than backwards, looking. Analysts see substantial upside to services spending over coming quarters for the areas that were most severely impacted by COVID such as dining, recreation, transportation, and tourism. Thus, higher growth should see these areas return to more normalized levels by year-end.
With the stock market having rebounded sharply from its March meltdown, the S&P is now up a staggering 55% from its Spring lows. While the world continues to battle the COVID pandemic with the hopes of a vaccine or herd immunity continuing to be pushed back, the Federal Reserve has delivered massive monetary accommodation in support of the struggling U.S. economy. In the process, our central bank increased its balance sheet above $7 trillion at the end of Q3.
To the surprise of almost everyone, especially as it occurred in the face of a global pandemic which in turn drove a global economic lockdown, the S&P 500 produced its best quarterly return since the 4th quarter of 1987 with a gain of 20.5%. This astounding performance came in the face of U.S. unemployment climbing by an unprecedented 11 percentage points in less than 6 weeks as 30 million Americans became immediately and unexpectedly unemployed as state and local governments shutdown local economies in an effort to rein in the rapidly spreading COVID-19 pandemic.
As we started 2020, the prognosis for the global economy was solid. Little noticed though was news reports starting to come out of the Chinese city of Wuhan about a new flulike disease. Oh, how the world has changed in a mere 3 months….
In 2019, we saw stocks and bonds stage an extraordinary run with the S&P 500 having its best year since 1997. Together, stocks and bonds had their biggest simultaneous gains in more than two decades. The market was up slightly more than 30% with the Information Technology sector showing an enormous re-bound from its 4Q2019 meltdown as the sector surged by more than 50% for the year.
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