2021: A Year In Review

December 29, 2021  |  Michael Reilly

As we near the end of 2021, we find ourselves standing at the threshold of another year.

It’s the perfect time to reflect on the past year and plan ahead for the one about to start.

If you found the stock market more challenging than usual this year, trust me when I tell you, you are not alone. 

2021 will forever be known as the year the market went missing in action. Let me explain.

In any given year, a certain investing style might dominate, like growth, value, size (small vs. large-cap), low-volatility, yield, or momentum.  

During periods of uncertainty, investors favor stocks that have lower market volatility or offer a decent yield to help compensate for the greater perceived market risk.

During “risk-on” periods, with the general trend of the market rising, we often see growth and momentum factors perform best.

With that being said, in 2021 the dominating investing style was…

None. Nada. Zilch.

Over the past twelve months, every single style underperformed the S&P 500 benchmark. 

Large-cap growth, represented by the red line (Russell 1000 Growth) was the best of the worst with a performance that was -0.49% when compared to SPY.

This has never happened before over the past 20 years. There has always been at least one factor that managed to beat the benchmark.

Here is a chart going back to 2010 to illustrate.

The average excess return of the dominant style has been around 8.67%.

The dominant style tends to rotate from year to year, with the exception of 2019 and 2020. But 2021 has had no dominant style. What gives?

By applying a monthly ranking, we can see that the year has been divided with small-caps performing the best at the beginning of the year and large-caps performing better in recent months.

2021 has been the year of low participation of most stocks – a small number of mega-caps have carried the market to recent all-time highs, but the vast majority of stocks have not participated.

We can see this when we compare the relative performance of the equal-weight S&P 500 (RSP) – we can see that it has underperformed the cap-weighted SPY since mid-year.

The fact is, only a handful of the largest large-caps have contributed to much of this year’s market performance.   

Specifically, the top 15 stocks within the S&P 500 account for 46% of 2021’s index performance:

In total, these 15 stocks have contributed 1,352bps (13.52%) of the S&P 500’s 29.39% total return. This implies that the other 485 stocks account for the other 54% of the market’s return.

There is very clearly a negative divergence that points to underlying market weakness and not strength that one might assume is present with a market at its highs.

It also helps explain why no single factor is able to dominate the cap-weighted performance of the S&P 500 index, because the majority of stocks are not performing well.

Stocks started to leave the party early in the year, and there are only a few left hanging around the punchbowl. When they leave, the party is over.

Another piece of evidence to the “missing stock market” can be seen in the advance-decline line, which has been especially weak for the Nasdaq.

Notice how the A/D line has been steadily falling since mid-year – this shows a weakening market structure.

Seeing this, you have to wonder if something similar has occurred before… turns out there has.

Between 1999-2000, the market surged to new all-time highs in the height of the dot.com mania – while at the same time, the A/D line was sinking… just as it is today.

With the foundation crumbling, the market finally rolled over and didn’t find a bottom until about 70% of the Nasdaq’s value had been erased.

Looking forward into 2022, it seems apparent that market leadership needs to broaden out significantly.  

While the recent market closes at new all-time highs sounds exciting, the fact remains that market internals are nowhere near confirming.

A significant broadening of leadership will be required to put the stock market on solid ground to further any significant advance…

The alternative is that the market indices follow the internals and 2022 will test investors’ ability to play both the long and short side of the market.

Rowe Wealth can help you tackle 2022 without a single worry about which way the market is heading – just give us a call. You can schedule a free 1-hour consultation to review your portfolio and determine your risk score here.

Wishing you a Happy & Prosperous 2022,

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