2021 Look Back — Week of January 10, 2022

Full Year 2021 Table: 

As of market close December 31, 2021. Returns in percent.

Through Friday, January 7, 2022: 

As of market close January 7, 2022. Returns in percent.

2021 Look Back

Last year will be remembered fondly by traders for many reasons. Two stand out: One, the S&P 500 rose over 28%, posting a new record at least once a month. Ponder that rare feat for a moment. And yet polling of retail investors shows they believe this is a crummy market. Two, record earnings, cash balances and low interest rates set a foundation for future gains. 

The S&P 500 led all major indices in performance and drawdowns. There were only three down months: January, September (delta drag), and November. From February through August, the index posted positive results every month. Bespoke Research tells us that there were only four multi-day declines of 4% or more. Remember, the “typical year” sees five or more declines greater than 5%. The biggest one-day drop for the S&P 500 was 2.5% on January 27th. 

In the rest of the U.S., the Russell 2000 was the only index that did not break the 20% level. Given small cap’s run early in the year with reopening excitement, we thought small cap stocks could run the table. Thankfully, our indicators gave a timely signal back to the safety of the big names. Dividend and mega-cap tech stocks were the full-year leaders. Energy was the top performer of the 11 S&P sectors, posting a 53% bounce. Financials and Tech in the mid-30s landed on the podium in second and third. 

Looking Up

Consumers account for about two-thirds of the economy, so job growth is an important indicator for GDP. Friday’s payroll update from December showed new hires of 199,000, and while below expectations, the underlying numbers showed solid growth in both manufacturing and construction. The participation of prime-age employees continued to improve, climbing 0.2% to 79.0%, only 1.5% off the pre-Covid high.

Average hourly earnings continue to rise, indicating that labor demand is strong. Gains in wages were across all cohorts. Low-wage earnings were up 0.6%, middle-wage earnings up 0.5%, and high-wage up 0.9%. Also, 100% of industries now have 3-month wage growth above long-term trends. Hours worked accelerated from last month, showing continued robust income production for workers.

ADP’s payrolls report comes out the Wednesday before Friday’s government payroll report. ADP is the “younger brother” having started in 2008. ADP tabulated 807,000 new jobs in December, the most in the last seven months. Service industry jobs dominated with 669,000 of the totals. Goods-producing jobs were up the most since September 2020. This number is much closer to the BLS Household change in civilian employment of 651,000.

Another indicator of employment is the Job Openings and Labor Turnover Survey (JOLTS) that came out last week. No, this is not the cola with “all the sugar and twice the caffeine,” but it showed lots of energy. The total number of job openings stayed above 10.5 million, indicating approximately 1.5 available jobs for each out-of-work person! This is starting to look a lot like full employment. The turnover portion of this survey showed 4.5 million people quit their jobs in November, a record quit rate of 3%. This shows people are comfortable leaving their current position, confident they can find new employment quickly.

Looking Down

The Institute of Supply Management’s report on manufacturing has taken on new focus as concerns about supply chain constraints bubble up in prices consumers pay. The Purchasing Managers Index (PMI) for December fell 2.4 points to 58.7, but is still running above the historical mean during the previous expansion of 54.1. A positive indicator for easing inflation fears showed the Prices Paid component with the largest month-over-month drop since 2011. Suppliers can more readily get materials, and prices paid for them are declining. Demand for materials continues to be strong, reflecting industry’s need to bring more goods to consumers. But falling shipping and materials costs are a positive. Producer prices flow through to consumer prices with about a year lag. 

Omicron effects and concerns are likely impacting consumer attitudes and actions and could lower first quarter economic growth. While the number of people testing positive is increasing dramatically, the severity of symptoms (fewer hospitalizations and deaths) is not as high.  

The Langer Consumer Comfort Index dropped 2.3 points in the last two weeks, to its lowest level in the last year. An important point is that while consumers’ assessment of the economy weakened, their views on their personal finance increased slightly. The consumer balance sheet is still in great shape and there is also still a significant amount of liquidity in the system remaining to be put to work. Both are very good signs for the strength of the economy.  

We still believe that inflation will be peaking in the next few months, with the risk of the omicron variant pushing this out a few months. Supply chain and commodity prices are off their peaks, and we are seeing stabilization in most prices.  

While long-end US Treasury rates have risen modestly, the flattening curve shows confidence in the FOMC’s willingness/ability to fight inflation by raising short-term rates later this year.  

Looking Ahead

The December Consumer Price Index will be released on January 12 and will be watched closely. In November, the overall index rose 0.8%, with a core (e.g., ex-Food & Energy) up 0.5%. Housing prices, like producer prices, take about a year to reach consumers and affect the CPI. We still expect CPI to move lower later this year. Retail sales estimates for December should show a drop from the prior month, thanks to falling gasoline prices and lower auto sales. The drop in auto sales is a function of no supply, not demand. 

This coming Friday, three of the big banks kick off the fourth quarter earnings season. Wells, Citi, J.P. Morgan, and investment firm BlackRock all report. Delta Air Lines reports on Thursday and may give us clues on the state of travel during omicron. S&P 500 revenues for last quarter are expected to grow by 6% and nearly 10% for all of 2021. Earnings per share consensus estimates are 14% and 26% respectively. 

Wrap-Up

The Santa Claus rally that finished on the 4th set a nice tone. The hawkish Fed minutes released on the 5th dropped a 1.5% lump of coal on traders. The Dow, Russell and S&P families of indices found support around their 50-day moving averages and sulked the rest of the week. Earnings growth, the key to higher stock prices, remains strong. Our indicators continue to point to gains for stocks this year. 

Futures markets now project the Fed raising overnight rates by a quarter of a point in March, instead of July. The economy remains in very good shape, and multiple rate increases will not dent growth. Omicron and other variants should become part of the daily fabric and not a stall to growth. Interest rates moving higher should be the big story for the year — a natural consequence of returning to “pre-pandemic” markets. 

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary's University School of Law. Follow him on Twitter here. Mark Frears is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Science from The University of Washington, and an MBA from University of Texas - Dallas.

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