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10 Stock Market Trends for the End of 2021

Even though the S&P 500’s year-to-date max drawdown is just 5.2%, there’s never a shortage of questions on the minds of investors. And with concern over a further market pullback growing, many advisors and their clients are wondering what’s in store for their portfolios. Is the sky falling? Or just another bump in the bull market road?

To shed light on where the market may be headed next, we’re breaking down ten prevailing stock market trends that are worth keeping an eye on through the end of 2021:

 

1. Inflation: Will it Stay Above 5%?

Since 1990, US inflation has topped 5% in only three years: 1990, 2008, and 2021. In the former two of those calendar years, the S&P 500 has declined by as much as 16.4% (1990) and 48.8% (2008). Just prior to the start of both corrections, the index had reached a new all-time high. Based on past performance, when inflation remains this high—and one-year ahead expectations currently suggest it will—a market pullback appears more likely. However, if inflation cools off quickly, as it did in 1990, 2008 and 2021, stocks could benefit from a market-wide sigh of relief.

US inflation, one-year ahead inflation expectations from 1990 through October 2021

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2. 10-Year Treasury Finally Retakes 1.5%

What a time it was to be alive from 1962 to 1981. We landed on the moon, color TVs brought wonder to our eyes, and the 10-year treasury rate nearly quadrupled to an all-time high of 15.84%. 

Though equity holders realized a modest 2.5% annualized return in the S&P 500 during that time—no thanks to an unfriendly federal funds rate that peaked at 22.36%—the 10-year note earned its holders no less than 3.8% at any given time in those two decades. Since then, however, fixed income has fallen greatly out of favor. Following the 10-year’s peak in September 1981, the S&P 500 has risen 3,640% (excluding dividends), while the 10-year treasury yield has fallen 90.3%.

10-Year Treasury Rate and Effective Fed Funds Rate from 1962 through October 2021

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The multi-decade decline of the Fed Funds rate has been a boon for stocks all along the way, but treasury yields have gone right down with the benchmark rate, to as low as 0.52% in August 2020 for the 10-year note. Though the 10-year has rebounded to 1.5%, does this rally represent a significant turn-around for fixed income yields, and will market returns shift back to their modest 1960-1980 levels as a result? Or is it a short-term bump on a slide toward 0%, making treasuries even less feasible for long-term returns?

10-Year Treasury Rate and Effective Fed Funds Rate from 2016 through October 2021

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3. Social Media Selloff

Much of our online communication runs through large tech companies such as Snap (SNAP), Facebook (FB) and Twitter (TWTR). However, with great power comes great responsibility, as evidenced by recent scrutiny brought against these social media giants. Notably, Facebook has been accused of prioritizing its bottom line over user safety, while Twitter has been in hot water for allegedly “burying” tweets and suspending users for reasons seen as arbitrary.

Whether these companies are guilty or innocent, the court of Wall Street has spoken. The last time Twitter made an all-time high was on March 1st of 2021 and is currently down over 20% from that level. Facebook set its most recent all-time high just a short time ago on September 7th, yet shares have slipped over 16% since and caused $175 billion in market cap to be wiped off the tech giant’s name. It goes to show that even one headline (and a congressional hearing or two) can drastically swing an individual stock’s share price—and drag its industry peers along with it.

Facebook (FB), Twitter (TWTR), Snap (SNAP) percents off highs as of October 2021

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4. “Reopening” Stocks vs. The Delta Variant

For the past 18 months, the performance of so-called “BEACH” stocks (Bookings, Entertainment, Airlines, Cruises, and Hotels & resorts) has largely been tied to the ebbs and flows of COVID-19. When daily cases and deaths rise, economically-sensitive BEACH stocks—such as the equally-weighted Model Portfolio of Booking Holdings (BKNG), Live Nation (LYV), United Airlines (UAL), Carnival (CCL), and Wynn Resorts (WYNN), shown below—tend to fall as economic reopenings slow down.

Even though the delta variant stopped a BEACH rally in early June, cases and deaths per day appear to have begun waning from this wave’s highs, making for a potential buying opportunity in BEACH stocks.

US coronavirus COVID-19 cases and deaths per day as of October 14th 2021

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5. A Little Cryptocurrency Goes a Long Way

Alternative assets such as cryptocurrencies have been viewed by some as hedges against inflation, fiat currency, and equity markets. However, others see their large price swings as opportunities to gain extra returns. Turns out it hasn’t taken much of crypto assets like Bitcoin to generate large amounts of alpha—if you had taken just 1% of an all-SPDR S&P 500 ETF (SPY) portfolio and invested it into a cryptocurrency ETF such as the Grayscale Bitcoin Trust (GBTC) at its inception, that mere single percent would have provided an extra 86% of total return as of October 12th, 2021. If you had increased the GBTC weighting to 5%, your portfolio would have returned 540.2% compared to 195.7% in an all-SPY investment.

Portfolio returns for 100% S&P 500, 1% Bitcoin, and 5% Bitcoin from September 2013 through October 2021

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It should be noted that the relative infancy of crypto assets makes them susceptible to more risks than traditional investments, such as threats of regulation and even full-out bans, as was recently announced in China. This naturally results in larger drawdowns (as illustrated below), but those who can stomach elevated volatility may reap higher rewards long-term with just a fraction of one’s portfolio invested. Investors who wish to gain equity-style cryptocurrency exposure can select from Grayscale’s Ethereum (ETHE), and Ethereum Classic (ETCG) trusts, as well as Osprey’s Bitcoin Trust (OBTC), to name a few.

Portfolio drawdowns for 100% S&P 500, 1% Bitcoin, and 5% Bitcoin from September 2013 through October 2021

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6. Energy Stocks Fuel up

WTI crude oil hasn’t surpassed the $80 mark since October 2014—until now. Traders might regard the rally in oil prices as positive news for energy stocks, as the SPDR Energy Select Sector ETF (XLE) just retook its pre-pandemic low of 51.77 from January 2016, but is still down considerably since peaking in 2014.

WTI Crude Oil, SPDR XLE, and ICLN price changes from 2012 through October 2021

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Interestingly enough, clean energy made its largest move ever during the pandemic, when oil was even cheaper than it was in the late 2010s. The iShares Global Clean Energy (ICLN) ETF low returned as much as 285% from its low on March 23rd, 2020, and is still up 164% to date. Even though oil prices are the highest they’ve been in seven years, WTI is still 30% off its September 2013 all-time high, providing plenty of potential opportunity for energy stocks across the board as the global economic recovery continues.

 

7. Building Profits in Housing Stocks

Prices for both new and existing homes are at all-time highs, and it’s not just sellers who are benefitting—home improvement stocks Lowe’s (LOW) and The Home Depot (HD) are also reaping the rewards. Lowe’s and Home Depot have returned 14.4% and 11.8% on an annualized basis since 1999, respectively. Both rising home prices and the number of single family houses for sale have been boons for home construction company PulteGroup (PHM) as well.

Median Sales Price for New Houses, New Single Family Houses for Sale, Existing Home Median Sales Price, and LOW/HD/PHM returns from 1999 through October 2021

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Holders of these stocks, however, ought to watch the level of home prices, as these names are largely tied to changes in home values and new construction. With home prices at all-time highs—along with the share prices of Lowe’s and The Home Depot —even higher prices may be necessary to keep building shares of these companies higher as well.

 

8. Shipping, Retail, and the Consumer

After plummeting in March 2020, US Retail Sales have not only rebounded but are actually growing at an accelerated pace relative to past periods. Retail and freight stocks such as the SPDR S&P Retail ETF (XRT) and FedEx (FDX) have benefited tremendously—but, as shipping costs soar, retail stocks and retail sales have cooled off. Shipping rates for a 3500 TEU vessel—an average-sized freighter that can transport 3,500 standard, twenty-foot long containers—are up nearly 7x from their eleven-year average.

If container shipping rates remain this high, it’s likely that retail companies will pass these costs onto consumers in the form of higher prices. That could dent consumer spending, but with one-year ahead household spending growth expectations at 5%—one of the highest levels on record—it appears consumers are willing to keep purchasing. If this holds true, retail and freight companies might be able to stomach higher shipping costs without negative impacts to their bottom lines.

US Retail sales, US Household Spending Growth, FDX, and XRT from July 2010 through October 2021

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9. The Benefits of Deficits

Whenever debt ceiling negotiations crop up in Washington, the US Trade Deficit often gets lumped in with those discussions. As debates about increasing the US’s debt limit take place on the Hill, the trade deficit’s recent all-time high has not gone unnoticed. One would assume that a deficit is a bad thing, but history shows the S&P 500 has largely risen and declined in tandem with the trade deficit. Despite it sounding counterintuitive, it appears equity holders ought to hope for a growing imbalance between imports and exports.

US Trade Deficit from 1992 through 2021

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10. China vs. USA: Whose Public Companies Will Own the 2020s?

In 2000, if you chose to invest in either China or the USA, your returns would be about equal as of today. Even though the MSCI China index returned 150.2% to the MSCI USA’s -12.2% from 2000 to 2009, and then US stocks outperformed Chinese stocks 408.2% to 89.4% from 2010 through the present day, both indices achieved similar annualized returns over the past 21 years.

The question regarding the world’s two economic superpowers is: whose public companies will deliver higher returns over the next decade? Recently, China has increased regulation on its largest corporations including Alibaba (BABA) and Tencent (TCEHY), not to mention incidents of financial instability such as the recent Evergrande debt crisis. Will the USA continue its dominance thanks to greater economic freedoms and elections—both political and in the context of shareholder rights? Or will China’s “state capitalism” overcome regulation concerns with its higher GDP growth rate and greater export market?

MSCI China vs MSCI USA returns from 2000 through 2021

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