For Main Street and Wall Street, 2021 was a tale of two years

MANHATTAN (CN) — The past 12 months have been a mixed bag for Main Street, but for Wall Street it has been by most measures an unmitigated success.

All three major U.S. indices have gained significantly over the past year, driven by soaring corporate earnings and government stimulus and in spite of the challenges posed by Covid-19 and inflation.

Since the beginning of the year, the S&P 500 has logged more than 70 record highs this year — including this week, where it finished at 4,778 points — to gain 1,022 points overall. The Dow Jones Industrial Average also has increased roughly 20% for the year, settling at 36,398 points, nearly 6,000 points higher than where it started last January. The Nasdaq, while not doing as well as in 2020, managed to pull in 2,853 points this year.

One of the main constants this year for markets has been the ebb and flow of the Covid-19 virus, as investors have grown accustomed with new variants, first the delta last summer and now with omicron.

Recent studies suggest omicron is not nearly as deadly as delta, though Tedros Adhanom Ghebreyesus, director-general of the World Health Organization, warned on Wednesday that new variants of the virus could become fully resistant to vaccines. Ghebreyesus said he still remains confident that the acute stage of the virus may end sometime in 2022.

So far, the market has digested omicron fairly easily. “While the numbers of infected are scary, the spike in hospitalizations and deaths has been very modest,” James Meyer of Tower Bridge Advisors told investors on Friday. “Economic values are determined by the present value of future cash flows. A few extra disruptive months won’t make a whole lot of difference.”

He pointed to the 8.5% increase in holiday sales, a figure that he said suggests “we collectively learned to deal with such disruption rather easily” and that fear of Covid has waned.

Another key storyline for 2021 has been the strained supply chains and rising threat of inflation, with the latter rising at the fastest pace in four decades. The biggest drivers in inflation, cars and groceries, will likely be less of a factor in 2022 than they were in 2021, experts say.

Experts also forecast supply chains will open up as the market hardens against Covid-related issues.

“Both the manufacturing and construction sectors of the United States are ending 2021 in a good position with a strong output and healthy-looking order books,” said James Knightley, chief international economist of ING. “This should provide a decent platform for growth in 2022 even if the latest wave of the pandemic is likely to lead to a more cautious household sector.”

He noted that manufacturing output is 1.7% higher than it was in December 2019, but it still remains the all-time peak in December 2007. “Nonetheless, with the ISM reports continuing to point to a strong growth and the regional manufacturing surveys also encouragement with healthy order books we are hopeful that the sector can continue eating into this deficit through 2022,” Knightley wrote in an investor’s note.

It was also a very good year for initial public offerings and corporate earnings. “Not only has it been a record year for IPOs but globally we’ve seen over 2,800 businesses raise more than $600 billion, blowing the previous record, set in 2007, out of the water,” Michael Hewson, chief market analyst at CMC Markets, wrote. He warned that the successful IPOs seem to be based more on “whether or not they are trendy, rather than on the resilience of their finances.”

For corporations, only one of the 11 major sectors — the financial sector — reported a year-over-year decline in earnings in 2021, according to John Butters, a senior earnings analyst at FactSet. The market as a whole saw a record-high earnings growth of 45.1% this year, he noted.

Overall growth, measured by gross domestic product, is also likely to continue increasing, though will be mitigated by inflationary pressures.

Meyer predicts that fourth quarter GDP will likely increase by 6% to 8%, with nominal GDP growing by at least 13% and “more earnings upside surprises” in mid-January when the next big round of earnings reports releases.

“Thus, for investors, we face a year where higher than expected earnings will be the tailwind, while higher inflation will be the headwind,” he wrote. “Which wins will determine whether 2022 is another year of solid growth in the stock market or not.”

One of the great success stories of 2021 has been unemployment. Since last January, weekly claims filed with the Labor Department have dropped about 400%, from just under 800,000 initial claims in the beginning of the year to less than 200,000 the last full week in December.

In fact, the number of initial claims filed with the Labor Department the week ending December 25 — which came in at 198,000 claims, a few thousand claims below what experts had predicted — marks the lowest number of claims since 1969. A few blips during the summer notwithstanding, claims have steadily and consistently dropped since April 2021. The number of continuing claims, which now hover around 1.72 million, are at the lowest level since before Covid-related lockdowns began.  

Some experts warn that unemployment claims could pick up slightly but still believe they will stay low enough for the Federal Reserve to continue with its plan to taper bond purchases and raise interest rates.

“The claims data may be more volatile in the upcoming weeks due to the seasonal adjustment process, but looking past that noise we expect claims to remain around 200K as layoffs remain low amid tight labor market conditions,” analyst Nancy Vanden Houten of Oxford Economics wrote.

Follow @NickRummell

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