Market Commentary


Monthly Financial Markets Commentary — January 1, 2022

Stocks advanced strongly in the month of December, capping off a stellar year. Bonds had modest losses. The good news is that the S&P 500, the broadest measure of stock performance, rose 28.41% after advancing 18.25% in 2020. The bad news is that the S&P 500 gained 18.25% in 2021 after gaining 18.25% in 2020. The point is that outsized gains in future years are that much less likely given such strong recent advances (similar to the late 1990s).

For 2021 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, returned 28.41%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, returned 21.49%. Finally, the Dow Jones Industrial Average, a price-weighted index, returned 20.68%. All returns include dividends. Investors have returned to FANG and other glamour stocks in droves, despite the fact that these stocks already have very high valuations. The Fed continues to purchase massive amounts of U.S. government bonds, effectively monetizing more that half of the current federal deficit. The Fed has, however, indicated that it will begin he process of reducing the monthly purchase of debt securities soon. All things being equal this will tend to increase short and long-term rates.

The Barclay's U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, returned -1.77% for the year. The 10-Year Treasury Note, the so-called "risk-free" rate, jumped to over 1.75% earlier in the year but has since fallen modestly to around 1.50%. This leaves the entire complex of fixed income investments with negative real yields and projected returns, given inflation expectations at the present time.

The sectors in the equity market that performed the best in 2021 were Energy, Real Estate and Information Technology at 48.6%, 39.3% and 32.6%, respectively. Utilities, Consumer Staples, Communication Services fared the worst at 14.3%, 15.5% and -11.8%, respectively. The concentration of the major averages in a very select group of high-tech and other favored stocks is a troubling sign.

The comparison of current price/earnings ratios and dividend yields as of January 1, 2022 to those of the prior year is as follows.

Index

Current*

Prior Year*

S&P 500

Price/Earnings

29.33

40.40

Dividend Yield (%)

1.26

1.60

Dow Jones Industrial Average

Price/Earnings

26.60

30.11

Dividend Yield (%)

1.90

1.97

* based on 12-month trailing data

The dividend yield on the S&P 500 has reached the lowest level since the dot-com bubble of 2000, and is one of the best measures of value, since it is a statistic that cannot be manipulated by management. This testifies to the power of the Fed in driving down yields and driving up valuations.

Current national average CD deposit yields for one-year, two-year and three-year instruments are .65%, .75% and .85%, respectively, rendering this traditional class of investments virtually un-investible.

Gold and crude oil most recently traded at $1,832.80 and $79.00, respectively, compared to $1,901.25 and $49.50 one year earlier. Crude oil and natural gas prices fell during the period due to the release of oil through the Strategic Oil Reserve and signs the global pandemic may be worsening in the short term