U.S. stocks ended 2021 on a muted note, though capped off a record-setting year that saw the S&P 500 rise more than 27% despite ongoing tumult related in large part to the near-two-year-strrong Covid-19 epidemic.
The S&P 500 dipped 0.26% to close at 4,766.18, while the Nasdaq Composite fell 0.61% to end at 15,644.97. The Dow Jones Industrial Average sank 59.78 points to 36,338.30, losing 0.16%.
Pfizer (PFE) - Get Pfizer Inc. Report was among the S&P 500′s leaders Friday, rising more than 1% after British regulators approved the use of Paxlovid, the drugmaker’s Covid-19 antiviral pill, for people over 18 with mild to moderate symptoms.
The market saw a run of near-record highs this week as investors looked to a fresh start in 2022 that is likely to include more uncertainty and volatility but also more opportunity. The S&P posted its 70th record high on Thursday, marking the strongest year of gains for the broadest U.S. benchmark since 1995.
2021 Recap: A Record-Setting Year for Stocks
Entering Friday’s session, the S&P 500 was up 27.2% year to date. That puts the market benchmark on track for its third straight annual gain. Energy and real estate have been the best-performing sectors in the S&P this year, surging more than 40% each. Tech and financials are also up more than 30%.
The 30-stock Dow was up 18.9% through Thursday’s close, also putting it on pace for its third consecutive yearly gain. Home Depot (HD) - Get Home Depot, Inc. Report and Microsoft (MSFT) - Get Microsoft Corporation Report have led the Dow gains, rising more than 50% each.
The tech-heavy Nasdaq has risen 22.1% this year, putting the composite on track for its ninth annual gain in 10 years. Names like Alphabet (GOOGL) - Get Alphabet Inc. Class A Report, Apple (AAPL) - Get Apple Inc. Report, Meta Platforms (FB) - Get Meta Platforms Inc. Class A Report and Tesla (TSLA) - Get Tesla Inc Report have led Nasdaq’s gains this year.
2022 Outlook: Slower Growth and Muted Inflation
Friday’s expected calm trading session caps off a busy year in markets highlighted by extremes that drove investors to bid up all kinds of companies and sectors seemingly irrespective of market conditions, and, in many cases, valuations.
"Our base case is that 2022 will be a year of slower growth and inflation, a big shift from what investors have become accustomed to since the pandemic-induced recession of 2020," said David Rosenberg, chief economist and strategist with Rosenberg Research & Associates. "Against this backdrop, we believe expectations should be for weak stock market returns, a general outperformance of defensive/defensive growth sectors, and higher volatility."
Indeed, heading into 2022, Rosenberg and other analysts and market-watchers expect investors to take a more sober view of ongoing market gains amid the continued threat of the omicron Covid-19 variant and on increasing expectations that the Federal Reserve and other central banks will pull back on stimulus that has kept cash sloshing around the global economy since March 2020.
That in turn will likely prompt reassessments of sectors like travel and tourism, which have been upended by omicron surge.
2022 Outlook: Easing Chip Shortage and Supply Disruptions
On Thursday, the Centers for Disease Control and Prevention said “avoid cruise travel, regardless of vaccination status.” However, White House medical advisor Dr. Anthony Fauci predicted earlier in the week that the omicron wave could peak by the end of January.
Other sectors including manufacturing, which have been slammed this year due to the ongoing global semiconductor shortage as well as global supply chain disruptions, are also expected to register a turnaround in 2022, potentially damping concerns about rampant inflation.
"While supply chains are still strained, there have been positive developments that suggest inflation should be on a downward trajectory in 2022, particularly in the U.S.," Rosenberg said.
Chen Zhao, founder and chief global strategic with economic research firm Alpine Macro, sees 2022 as a year that will be marked by three major transitions: from a recovery boom to a new steady but much-reduced growth rate; from hyper-stimulate to more muted monetary policy and a broader financial market transition.
2022 Outlook: Party Like It's 1999... for Now
"Our thought is that for the first half of 2022, the bull market could continue to advance on a parabolic path like what occurred in 1999," Zhao said, pointing to a still-strong U.S. economy driven by job creation and continued strength in consumer spending, which in turn will keep earnings strong in the short term.
"Although the Fed is turning hawkish, the current monetary environment is hyper stimulative. Historically, stocks tend to keep rising even after the Fed begins to raise rates. Only when the Fed over-tightens do stocks fall. We are far from that point.
"In fact, there is a strong possibility that the S&P 500 could experience a melt-up in the next two to three months," though that will be followed by a re-rating of stocks and sectors as inflation posts an "unexpected fall," which in turn could ease concerns of the Fed "...rushing into rate hikes, thus making policy mistakes."
"Lower inflation could also create expectations that the current monetary setting could last longer than what is being discounted," Zhao said.