2021 ended on a positive note with a rally off the final pullback in late November and early December. Overall, the major indexes had a good year, but the results for individual stocks was mixed. The year started off strong, but by May many stocks had achieved their highs for the year. For the last seven months of the year, it was a choppy sideways market.
The real story of 2021 is the stealth correction that took place under the surface. If you only watch the S&P 500 Index, you missed this important action. When one sector got hit, another was recovering and moving up. Sectors bottomed at different times rather than all at once. This sector rotation supported the S&P 500 Index masking double digit declines in industry sectors and individual stocks.
There were two catalysts behind this divergence in returns last year. First, rising interest rates is negative for growth stocks and especially the technology sector. Rising interest rates hurts technology stocks, it benefits the financial sector, energy, basic materials, and industrials. These sectors hold value stocks and they peaked in May and June, offsetting the six month decline in technology. It was this rotation that resulted in value stocks outperforming growth in the first half of the year.
The other influence on this rotation was the decline in COVID 19 cases early in the year and the reopening of the economy. Many technology stocks benefited in the last half of 2020 from the shutdown economy. As the economy started to reopen in the spring of 2021, technology stocks declined. Sectors that peaked in August as the economy continued to recover included communications, healthcare, and real estate.
By October technology resumed its uptrend after several months of digesting its earlier gains, and growth once again outperformed value stocks. The growth to value relationship was a tug of war all year and is still one to watch in 2022 because in December value stocks resumed their leadership.
This sector rotation resulted in sideways trading for several months last year and it allowed individual stocks to digest the sharp gains off their 2020 lows. For those that say the market is overvalued going into 2022, I point to the correction in industry sectors and individual stocks last year. By the first week of October half the stocks on the tech heavy Nasdaq were at least 20% below their 2021 highest price. And, fully one-third of the 2800 stocks on the NYSE were trading more than 20% off their 2021 highs. A correction took place in 2021 under the surface.
Looking to 2022, according to the American Association of Individual Investors (AAII) survey, investors’ outlook became more bearish as 2021 drew to a close. Even Wall Street analysts are predicting modest gains in 2022. These surveys represent a reaction to recent events and an emotional response to the market and are often a contrarian indicator.
The sideways choppy market for much of 2021, stocks breaking out to new highs as the year ended, along with the rather pessimistic outlook by many, all point to the prospect of a positive market in the near term.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.