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2021 Year in Review

Investing
In 2021, corporate earnings were strong, the Federal Reserve held interest rates at zero, and the Federal Government spent money like crazy.  I wrote about my opinions on government spending in the April 2021 newsletter and will not repeat it all again, however, I will restate the three main concerns which were inflation, government debt levels, and tax increases.  We have seen two of the three and the next section of this letter deals with possible tax increases. While these issues give us pause, strong corporate earnings and the government’s approach has been good for stock returns.  Here are the returns for 2021 of several different asset classes followed by commentary:

 

  • S&P 500 (US large stocks)                                           71%
  • Russell 1000 Value (US large value stocks)             16%
  • Russell 2000 (US small stocks)                                  82%
  • Russell 2000 Value (US small value stocks)           27%
  • MSCI EAFE Index (international stocks)                 78%
  • Barclay’s US Gov/Corp bond index                     -0.97%

 

As you can see, value stocks performed well and so did the S&P 500.  Historically value stocks have outperformed growth stocks, but over the last ten years that has not been the case.  If we look at stock prices relative to earnings, there has never been a time where the valuation spread between growth stocks and value stocks has been wider.  Is this value performance the start of a trend to normalize that spread?  We can never be sure in the short term but over time it seems like it must happen.  History has shown if you buy something for a good price your return is normally better than if you overpay.

You will also see that bonds were slightly negative in 2021.  The Fed’s zero interest rate environment has made it hard on bond rates and returns.  So, the question is:  should one still own bonds?  The short answer is yes – if your investment plan calls for them.  Last year’s returns are a good example of why bonds are a good offset to stock volatility.  A “bad” year in the bond market was losing less than one percent.  We don’t even consider the stock market to have had a correction until it is down 20%.

March of 2020 is a great reminder that if you want to buy stocks if they drop and go on sale, you better have bonds or cash available that have held their value

About the Author: Brent Walker

Brent Walker, CFP®, President is head of business operations for WealthPoint Advisors, LLC. His primary responsibilities are business strategy decisions, client communication, investment advice and management, and business development.