I wanted to begin this write-up remarking on the fact that COVID left us in 2021 and allowed other stories to dominate the headline. Of course, that was a bit of a pipe dream and not how things played out. With the Delta variant popping up in the summer and the Omicron now threatening our best holiday plans, COVID remained a market dominating story. Supply chain issues, inflation, growth concerns, Crude volatility—COVID had a hand in all of it. From a markets standpoint, it was a funny year. The ongoing headlines always felt heavy and sentiment seemed to bounce around a good bit, but in the end we saw record highs across US equity indexes (futures are pointing to the 70th record high of the year this morning) and Global Equities were almost exclusively in the green. Only China and Hong Kong (which we’ll discuss a bit below) really stood out for red numbers YTD. Now on to a more detailed discussion of the year that was 2021.
Outside of COVID, the largest market story of the year was INFLATION. Labor shortages and supply chain issues caused by pandemic related restrictions and shutdowns combined with a year’s worth of pent up demand aided by stimulus, tax cuts and government payments sent prices soaring in 2021. For most of the year, the Fed assured us that US inflation was “transitory” and kept a steady course. With the most recent months’ of data showing the highest level of inflation in three decades, that transitory word was dropped from the lexicon and price rises are being looked at as a more long term issue. A look at country inflation rates at the end of the third quarter shows us that price rises are not just a US issue by any means and many countries have seen record rates of increase.
I mentioned the Fed’s dropping the word “Transitory” above, and Central Bank action remained a major story in 2021 and heading into 2022. Last year, we discussed in great detail the extraordinary easing steps taken by Central banks and for most of this year, policies have remained loose and have helped to propel growth and drive markets higher. With that pesky inflation becoming more of a global concern, we have started to see central banks change course. At the most recent Fed meeting, the FOMC doubled its rate of tapering bond purchases and plotted a course for three rate hikes next year. Last week, the Bank of England became the first major central bank to raise rates and that decision came on the back of rate hikes from Russia, Mexico and Chile. With COVID spread again threatening global growth and much of the price rises attributed more to supply constraints than demand, global central banks will have quite the balancing act to complete next year. How they act and react will certainly be a major market driver and of key focus.
One major country that has not seen inflation and has recently pledged an accommodative stance is China. Unfortunately, China is one of the only major indexes to be in the red and has been in the news for many of the wrong reasons this year. Early in the year, China took strong action to curb government opposition with its policies in Hong Kong, leading to foreign business backlash. The government would continue to weigh on business as later in the year, China took aim at gaming companies, social media and for profit education. Ride share giant Didi ultimately decided to pull its NYSE listing after regulatory attacks. China even briefly interrupted the year’s crypto bull run when it announced it was banning cryptocurrencies. It was a year in which the Communist party of China very much re-established its presence…The biggest story out of China this year may have been the potential and then official default of Evergrande, the massive property developer with more than $300 Billion of liabilities. For a time it looked like Evergrande may just cause a global market meltdown, though that seems like ancient history at this point.
Of course, there is never a discussion of China without a discussion of US-China relations. With the US targeting delistings as part of a company blacklist and working more closely with other nations to scrutinize China’s behaviors, the diplomatic relationship was rockier in 2021. While an end of year virtual meeting between Biden and Xi offered some hope for improvement, the countries’ relationship remains tenuous. With China a major factor in the health of the global economy, its domestic and foreign interactions will be highly scrutinized going forward in ’22.
One asset class that leans heavily on China demand is Crude and Oil had another interesting year. While we didn’t get the craziness of negatively priced futures, we did have some notable storylines. As demand returned, crude prices saw strong gains throughout the year. A Saudi vs. UAE pricing war was avoided and Crude brought strong prices in the fall when big jumps in natural gas and oil led to fears of an energy crisis. With energy prices beginning to take its toll on consumers, the US and other nations took action to release special reserves in an attempt to control pricing. This caused a steep but brief sell-off and Oil is currently back over $72/barrel. As always, supply and demand will drive Oil prices in 2022 with China’s growth, OPEC production, International reserves and COVID related travel restrictions all likely to continue to be in focus.
Last year, we talked about the Rise of Retail Traders: “Whether you chalk it up to commission-free trading, an extended period of no sports betting, mobile friendly trading apps like Robinhood, highly entertaining forums like wallstbets, Barstool Sports’ Dave Portnoy or just an equity friendly environment of zero rates and massive stimulus; retail day trading activity grew massively in 2020 and wielded real pricing power on equities.” To say that retail traders wielded power in 2021 would be a MASSIVE understatement. The Wallstreetbets forum on reddit became a major market driver as retail investors collectively rushed into “meme stocks” and squeezed heavily shorted hedge funds. The drama that unfolded even led to a guy by the name of Roaring Kitty testifying in front of Congress and making clear, “I am not a cat.” Interesting times.
Meme stocks did not go away and continue to have real impact on global markets. We even got the launch of an ETF aptly tickered “MEME” (Roundhill MEME ETF). The reddit and meme stock explosion also led to serious conversations and increased regulatory scrutiny around online brokerage, investor protections and Payment for Order Flow.
Thought of the Week
“There are only two ways to live life. One is as though nothing is a miracle. The other is as though everything is a miracle.”
– Albert Einstein
Picture of the Week
All content is the opinion of Brian J. Decker
