Global Market Overview – December 2021
2021 has been a wild year in many ways. So wild, in fact, that you may have forgotten about a number of the weird and, in many cases, not-so-wonderful things that happened. Artefacts of 2021 such as the Capitol Riots and the performance of the England football team sit alongside memories of GameStop and Omicron.
Markets have had a lot to digest. They’ve had to think about the emergence of new Covid variants, asset purchase tapering, and more inflation scaremongering than anyone should ever have to deal with. Despite this unusual backdrop, many financial markets managed to look on the bright side and ended up having a very good year.
The S&P rose a staggering 26.9%, leaving the vast majority of hedge funds in the dust. And it wasn’t just US markets that had a good time. The FTSE 100 had its best year since 2016, rallying 14.3%, and Europe had its best year since 2009 with the STOXX 600 gaining 22.4% over the year. The only equity markets that have really been left behind are emerging markets – where Chinese regulatory clampdowns dominated.
So, what can we take away from all of this?
First, markets have largely got over worrying about Covid. The delta and now omicron variants have both caused huge outbreaks in terms of number of cases, but markets haven’t spent more than a week or so caring in any meaningful way. Back in July, you would’ve heard headlines about the delta variant sending UK and European stocks “crashing”, but this was the press overreacting, rather than investors. Yes, there were small sell-offs, but as time has passed, these have proved insignificant.
Second, (and more importantly) acting on every market signal is not helpful. Flailing around is a terrible way to manage a portfolio. There has been a lot that investors could have worried about in 2021. Inflation, tapering, and covid have all caused drawdowns at some point in the past, and many investors would have pulled out of markets in an attempt to avoid losses resulting from these factors. Doing this tends to leave investors running in circles and 2021 was a great illustration of this. When the general direction of markets is up, it is often best to sit back and do nothing.
Core views
A new wave of economic growth… For the past decade or so, the virtuous circle of consumption and investment has just not been able to get going. The scars of the financial crisis were too deep – people bought less while governments reined in spending. As a result, companies kept putting off investing in longer-term projects. The 2020 recession hit the reset button. People are willing to spend again, while governments have ditched austerity. And so, companies are starting to invest for the future. We are now at the start of a sustained period of growth, fueled by confidence and expansion across all sectors of the global economy.
And a little inflation won’t hurt… Economists tend to dislike thinking about the psychology of inflation, but in a lot of ways, someone’s inflation expectations are a good proxy for their confidence levels. With the right amount of price and wage growth, people are encouraged to make life decisions which are positive for the economy. We haven’t heard the word “Goldilocks” for some years now, but there really is an amount of inflation which is just right to keep things humming.
Summary
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
January 2022
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited