Week of January 3, 2022

Last Friday closed the books on another stellar year in the U.S. equity markets.  By the widest margin in 24 years, but only for sixth time in history, the S&P 500 outperformed the Dow and NASDAQ with the previous occurrences in 1984, 1989, 1997, 2004 and 2005. For 2021, the S&P 500, Dow and NASDAQ returned 26.89%, 18.73% and 21.39%, respectively.

Inflation and monetary policy are expected to be the key themes for 2022, as investors expect the Federal Reserve to raise interest rates multiple times in the coming year to help cool the rise in prices for consumers as well as producers.  Minutes from the FOMC’s (Federal Open Market Committee) December 15 policy-setting meeting, due out this Wednesday, could give investors a better picture of where the Fed sees interest rates going in 2022.

In spite of rising new COVID cases, inflation and the Fed, the outlook for 2022 is generally positive.  “Just as for the economy as a whole, the market story for 2022 will be a return to normal.  As hiring continues, spending grows, and businesses hire and invest, the economy will be normal.  The government is normalizing policy on the same expectations.  When you look at the macro picture, the overarching theme of 2022 will bring us back to something like normal,” Brad McMillan, chief investment officer for Commonwealth Financial Network, said in a note on Friday.  “We will get COVID under control.  We will get back to full employment.  And we will get back sustainable growth.  We’re not there yet, but we’ve made substantial progress.  Based on everything we can see from here, that progress will continue,” McMillan continued.

Stocks have a tendency to gain in the start of a new year as investors look to put new money to work, often referred to as the “January effect.”  The S&P 500 was up 11 of the last 13 years in the first week of the calendar year with an average gain of about 1.6%, Bank of America noted last week.