Friday marked the end of 2021, and on Wall Street, stocks were slightly down on the last day of the year. The Dow Jones Industrial Average (DJINDICES: ^DJI) fell about a sixth of a percent, the S&P 500 (SNPINDEX: ^GSPC) dropped a quarter-percent, and the Nasdaq Composite‘s (NASDAQINDEX: ^IXIC) losses exceeded half a percent.
Nevertheless, as you can see in the table below, the major market benchmarks did quite well:
2021 Percentage Change
2021 Point Change
A couple key trends stood out that supported stocks during the period. The bond market offered no real alternative to investors seeking returns, while a sector rotation led many market participants to reevaluate their portfolio exposure. A further look could provide some clues as to how 2022 might go.
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Bonds get punished
One reason why stocks did so well was that the bond market caused many investors a lot of pain. Despite all the turmoil over when the Federal Reserve would start to taper off from its asset purchases and allow interest rates to rise, short-term rates remained exactly where they started the year. Moreover, certain maturities didn’t see big changes, with the 30-year Treasury closing 2021 with a yield of around 1.9%, up just slightly from the 1.83% at which it started.
Where things really changed, though, was in the middle part of the yield curve. Ten-year Treasury yields rose from 0.9% to 1.5%, and five-year yields surged from 0.36% to 1.26%. Those moves showed anticipation of rate hikes in the near future.
The size of those increases might not sound all that bad. However, they were enough to create capital losses for investment vehicles holding Treasury bonds. The iShares 7-10 Year Treasury ETF (NASDAQ: IEF) lost 3% even after including interest income, while the shorter-term iShares 3-7 Year Treasury ETF (NASDAQ: IEI) was down more than 2.5%. Long-term bonds fared poorly as well, with the iShares 20+ Year Treasury ETF (NASDAQ: TLT) falling 4% on a total-return basis.
Those losses showed that Treasury bonds aren’t always free of risk — and rising interest rates could cause those price declines to continue in 2022. When even high-quality bonds can lose money, investors feel more comfortable about the known risks involved with stock investing.
The big rotation
One key trend that defined the performance of many individual stocks was a change in sentiment that led investors to look at different parts of the market. Throughout 2020, many of the stocks that performed the best were those with technological innovations that helped companies and individuals adapt to the ever-changing landscape of the COVID-19 pandemic. Many such companies, perhaps most notably Zoom Video Communications (NASDAQ: ZM), had been relatively unknown before the pandemic, but their products suddenly became much more relevant in a world with lockdowns and reduced mobility.
As vaccines became available and investors started to hope for an end to the pandemic, it became easier to question the assumptions that had led to those big gains. As a result, many high-growth stocks topped out early in 2021, and while some recovered lost ground, a good number of them ended the year with substantial losses. Meanwhile, more cyclical and defensive names in sectors beyond technology performed better than they had in the past.
Get ready for 2022
What will happen in 2022 is anybody’s guess, but it’s likely that investors will keep looking at the same trends they saw over the past year. As the Fed keeps pondering monetary policy, investors will have to be vigilant to find the next key trends driving stock market performance in the year ahead.
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