2021 Year in Review: A Recovery Amid Challenges

It was a year of uncertainty and anticipation, of hopes for a return to a degree of normalcy following the onset of the COVID-19 pandemic in 2020. And it was a year that showed, again, the difficulty of making investment decisions based on predictions of where markets will go—as well as the enduring benefits of diversification and flexibility.

Coming out of a volatile 2020, investors sought signals as to which way the global economy was headed. The distribution of vaccines and the easing of lockdowns were followed by an economic rebound, but the emergence of new variants would be a setback for the recovery. Despite these challenges, global gross domestic product grew, completing the transition from recovery to expansion and eventually surpassing its pre- pandemic peak.

Still, the recovery would be accompanied by labor shortages, supply chain issues, and rising inflation. Prices increased especially rapidly in areas such as food and energy, and the US consumer price index jumped 6.81%1 from year-earlier levels in November, a rise unseen in nearly four decades. The media was filled with debates about where inflation would go, what was causing it, how long it might last, and what could, or should, be done in response. (An investor pondering those questions might take comfort knowing that many assets in the past have outpaced even above-average inflation.)

Throughout the year, the market continued a relatively steady rise. In addition to the effective vaccines, markets were buoyed by a number of other positive developments, including strong corporate earnings and increased consumer demand. Markets that started the year strong were up and down in the year’s second half but still near all-time highs. Global equities, as measured by the MSCI All Country World Index,2 increased 18.54%.

Exhibit 1
(Largely) Steady Amid the Storms

Past performance is no guarantee of future results.
Source: Dimensional.com3

A Focus on Inflation

For investors worried about the impact of inflation on their portfolios, it is important to remember that US stocks since 1991 have generally provided returns that outpaced inflation. This is a valuable reminder for those concerned that today’s rising prices will make it harder to reach long-term financial goals. As seen in Exhibit 2, equity performance in the past three decades does not show any reliable connection between periods of high (or low) inflation and US stock returns. The weakest returns can occur when inflation is low, and 23 of the past 30 full years saw positive returns even after adjusting for the impact of inflation.

Exhibit 2
Stocks vs. Inflation


Source: Dimensional.com

Like in equities, when it comes to fixed income there is no reason to assume inflation will bring dire effects. From 1927 through 2020, median inflation was 2.68%, and in the 47 years when inflation exceeded that rate, it averaged 5.49%.4 Many types of bonds beat inflation over those 47 years, which included double-digit inflation in the 1940s and 1970s. Bond investments should always be matched to an investor’s goals—they aren’t one-size-fits-all. But inflation concerns needn’t scare one away from fixed income.

Remaining Flexible in a Fast-Moving Market

Spiking inflation and the ups and downs tied to the COVID-19 pandemic weren’t the only types of volatility drawing attention in 2021. Bitcoin and many other cryptocurrencies continued rising, prompting many investors to wonder whether this new form of electronic money deserves a place in their portfolios. But in its relatively short existence, bitcoin has proved prone to extraordinary swings, sometimes gaining or losing more than 40% in price in a month or two. Any asset subject to such sharp volatility may be catnip for traders but of limited value as a reliable medium of exchange (to replace cash), as a risk-reducing or inflation-hedging asset (to replace bonds), or as a replacement for other assets in a diversified portfolio. Thus, while cryptocurrencies may hold some appeal for adventurous investors, it’s hard to make a case for a significant allocation of one’s overall assets to them in the current moment.

Concentrating your portfolio in a few hot stocks or cryptocurrencies—like focusing on any small number of holdings—can expose investors to substantial risk. Even if you manage to find a few winners, research argues that good luck is unlikely to repeat throughout a lifetime of investing. For every individual who got into and out of a hot stock or cryptocurrency at the right time, there’s likely another who bought or sold at the wrong time

When Breaking Records Sounds like a Broken Record

In a similar way, there may be a tendency to think markets reaching a new high is a signal stocks are overvalued or have approached a ceiling. Such concerns may be especially potent now, with the S&P 500 having notched 75 closing records in 2021 on a total-return basis. However, investors may be surprised to find that the average returns one, three, and five years after a new month-end market high are similar to the average returns over any one-, three-, or five-year period. For instance, in looking at monthly returns between 1926 and 2021 for the S&P 500 Index, 30% of the monthly observations were new highs. After those highs, the average annualized compound returns ranged from over 14% one year later to more than 10% over the next five years. Those results were close to the average returns over any given period of the same length. Put another way, reaching a new high doesn’t mean the market will retreat. Stocks, at any time, are priced to deliver a positive expected return for investors, so reaching record highs regularly is the outcome one would expect.

This is a good reminder of the power of markets. Investors can’t predict the nature or timing of the next crisis, or the end of any existing ones. But markets are forward-looking and reflect optimism. New challenges will await, but rather than guessing at what will happen, investors can choose to trust markets and their long-term prospects. The year 2021 was one that emphasized the benefits of discipline and diversification, of planning and perseverance, in a market that was uncertain (like markets in all the years before it). As we enter 2022, looking backward can help as investors look to the future.

We are happy to discuss any of the above and welcome any questions or concerns you may have.


Danielson Group Wealth Management
Assante Capital Management Ltd.

1 Dimensional.com
2 MSCI data © MSCI 2022, all rights reserved. Indices are not available for direct investment.
3 In USD. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
4 US Inflation and Global Asset Returns