Home Investing Markets: S&P Wraps 12/21 with Best Performance in Decade

Markets: S&P Wraps 12/21 with Best Performance in Decade


Capital Markets Perspective brings you what to watch in the markets this week, published in partnership with Great-West Investments.

Week in Review

December 27– January 2

Even with all the headwinds, it was still a December to Remember®.

No, I’m not trying to sell you a Lexus. But if you were long the market in December, you might have suddenly found it a little bit easier to justify upgrading that Corolla in the garage, because your account probably went up: the S&P 500® Index finished December with a gain of almost 4.5%, the best performance in a decade of Decembers[1].

That’s despite a growing list of reasons that seem to argue it probably shouldn’t have. To review: the last few weeks of 2021 saw the introduction a new and hyper-infective COVID variant, a Federal Reserve that went from blasé about inflation to legitimately concerned about it in the space of just a few short weeks, and a litany of economic reports that seem to say yeah, growth is fine for now, but the best might be behind us.

So it was an impressive exercise in persistence by the equity market for sure. But market returns in December were notable for another reason, too – there was a tentative shift in where investors thought they might find the best opportunities. During much of 2021, growth-ier sectors of the market were the place where all the cool kids hung out: energy, technology and consumer discretionary stocks were among the sectors that outperformed the S&P 500 Index, while relatively defensive sectors like utilities and consumer staples lagged badly. In December, though, that dynamic was turned on its head: staples, utilities and real estate were suddenly en vogue, outperforming the index by a wide margin while those other sectors languished.

We’ve seen this movie before. In fact, until now the script has been almost as predictable as a Hallmark movie during the holidays: When COVID makes a comeback, so too do sectors like technology and telecoms; when it recedes, the focus shifts away from these areas and toward more cyclically-oriented areas. It’s not quite as familiar as the uptight-girl-leaves-the-city-and-falls-in-love-with-the-hometown-bachelor-who-sells-Christmas-trees kind of trope, but its close.

And that’s one of the things that makes December’s rotation away from tech and telecoms and toward staples and utilities even more interesting: it occurred just as Omicron was causing confirmed cases to surge – a far different outcome than we’ve become used to.

So what gives? Why did the script change so dramatically? Well, it could be that the market’s on-again/off-again love affair with the growthiest of growth stocks may finally have ended, and for good this time (Hallmark, are you listening? Not all endings have to be happy ones…) But perhaps the more obvious answer is that Omicron may not be quite as scary as its name makes it sound. While cases have indeed spiked, there has so far been no corresponding spike in hospitalizations or mortality (and an increasing body of research into trends in South Africa, where Omicron first raged, suggests that it might never develop[2].) Here in the US, the CDC agrees: new guidance issued on Tuesday[3] cut the time that asymptomatic COVID-positive patients should isolate in half, from ten days to five.

But what about those other headwinds? Santa Claus rally or no, at least institutional investors seem to be paying attention. A survey of institutional investment portfolios compiled by State Street suggests that big investors like pension funds and other professional investors suddenly became less enthusiastic about risk-taking in December, with the firm’s investor confidence index logging the biggest decline in its history as a result of Omicron and a more hawkish Fed[4]. While State Street’s index may not be designed to serve as predictor of future market returns, to me its somehow reassuring that at least somebody seems to be paying attention to the change in climate.

Now on to more mundane things, like purchasing mangers’ indices and regional Fed surveys. “Mundane” is precisely the right term, because all of the things that these reports and others like them have been saying about costs (stabilizing, but still too high), labor markets (better, but still stressed) and demand (easing a little but still on fire) have become routine. Last week’s heaping helping of “boring” came by way of the Dallas- and Richmond Fed surveys of manufacturers[5],[6] as well as the Chicago PMI,[7] none of which contained any big surprises.

The same was true for the modest helping of housing data we got last week as well. Transaction data continued to show that the once white-hot housing market has cooled, with pending transactions down 2.2% as a result of thin inventories and still-rising prices[8]. Indeed, home prices continued to set records, with S&P/Case-Shiller’s closely-watched 20-city index up 18.4% year-over-year through October[9] and the FHFA’s less well-known house price index up 17.5% over the same period[10]. Notably, though, this represented something of a deceleration from earlier periods, with the FHFA’s analysts going so far as to say that price growth probably peaked in July.

So mundane, yes, but not without some positive read-through. For example, if recent PMI and housing data are correct and cost pressures are starting to moderate, can a deceleration in inflation be far behind? It’s certainly possible, and that could take some of the pressure off the Fed. And that, of course, would provide markets with the Hallmark ending that 2021’s December to Remember seems to suggest investors – at least some investors – might be looking for.

What to Watch This Week

January 3– 9

Notable economic events (January 3-7)

Monday: Manufacturing PMI

Tuesday: ISM manufacturing, JOLTS, Consumer Electronics Show (CES)

Wednesday: ADP payrolls, Fed minutes, services PMI, Challenger layoffs

Thursday: ISM services, weekly jobless claims, factory orders

Friday: Payrolls/Employment Situation

Back in the day, the annual Consumer Electronics Show, or CES, had nearly as much swagger as the Grammys or the Academy Awards. Sure, you might be able to spy Leonardo DiCaprio or T-Swift at those big Hollywood soirees, but if you wanted to see Bill Gates or Cisco CEO John Chambers live-and-in-person, you had to travel to Las Vegas for the tech industry’s biggest event of the year. Of course, things haven’t really been the same for the tech confab since the tech bubble burst in the late 90s, and this year’s edition has been marred by cancellations from Intel, Google, Facebook/Meta and TikTok (after being entirely virtual last year.) But CES, which begins Tuesday and runs through Saturday, is still noteworthy if for no other reason than attendance will simultaneously show exactly how committed investors are to the sector, as well as how willing they are to brave Omicron COVID to attend.

That’s no small thing: massive disruptions in airline travel over the last two weeks have shown exactly how vulnerable the economy still is to COVID, even if the symptoms it generates are far less worrisome than in the past. The raw attendance numbers at CES might be far more interesting than anything presented at the show itself.

But CES is probably not the biggest event this week – Friday’s payrolls report wins that distinction. As discussed above, it seems as if there has been a small but legitimate turn for the better in labor market trends; at least, those businesses who respond to things like PMI surveys and regional Fed questionnaires aren’t complaining quite as loudly about it as they were. Whether or not that represents true progress (or simply business leaders throwing up their hands and learning to deal with it) will become evident this week as we get the standard trio of labor market data. The fun begins on Wednesday with ADP’s estimate of US payroll growth, followed by Challenger Gray and Christmas’ layoffs report on Thursday, and the BLS’ all-encompassing Employment Situation Report on Friday.

We also get four separate updates of PMI data, two doses of manufacturing data (one each on Monday and Tuesday), followed by services data on Wednesday and Thursday. While the message conveyed by this week’s PMI data is likely to be similar to what’s been said over and over again since around May of last year, one thing to watch for is any sign that PMI data is on the verge of slipping back below 50 (the level consistent with contraction) at some point in the future,  as well as the extent to which growth in new business for services-oriented industries is running ahead of growth in manufacturing. The latter of these two – services growth in excess of manufacturing – would, by some interpretations, send an important message about inflation. Because manufacturers are more directly impacted by supply chain snafus than service providers, additional cooling there could cause inflationary pressures to relent, while continued growth in services could help keep economic growth in general expanding comfortably. Or so the thinking goes, anyway.

Additional color could come from Tuesday’s release of the minutes from the FOMC’s meeting in mid-December, during which the Committee doubled the pace of the so-called taper a scant month after announcing it would begin. Details of that discussion – as well as thoughts from any one of a number of Fed speakers scheduled to present their thoughts at various forums around the country this week – could provide insight into exactly how concerned the Fed is about inflation.

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Personal Capital Advisors Corporation (“PCAC”) is a wholly owned subsidiary of Personal Capital Corporation (“PCC”), an Empower company. PCC and Empower Holdings, LLC are wholly owned subsidiaries of Great-West Lifeco Inc. Source for index data: Bloomberg.com; GWI calculations.


[1] Morningstar, Great-West Investments Calculations

[2] https://www.reuters.com/world/africa/safrica-study-suggests-lower-risk-hospitalisation-with-omicron-versus-delta-2021-12-22/.

[3] https://www.cdc.gov/media/releases/2021/s1227-isolation-quarantine-guidance.html

[4] https://www.statestreet.com/ideas/investor-confidence-index.html

[5] https://www.dallasfed.org/research/surveys/tmos/2021/2112.aspx


[7] https://www.ism-chicago.org/insidepages/reportsonbusiness/

[8] https://www.nar.realtor/newsroom/pending-home-sales-subside-2-2-in-november

[9] https://www.spglobal.com/spdji/en/indices/indicators/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index/#overview

[10] https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index.aspx

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