Investment Strategy

What we got right and wrong in 2021

Dec 10, 2021

Here’s a look back at our market views, and what’s ahead in the coming year.

Madison Faller, Global Investment Strategist

Federico Cuevas , Global Investment Strategist

Olivia Schwern, Global Investment Strategist

 

Our Top Market Takeaways for December 10, 2021.

Looking back

Our report card


As we get close to wrapping up another year, we’re taking a look back at examples of what we got wrong, doing a little victory dance for what we got right, and giving our best Marty McFly impression for what we’re expecting for the future.

Here’s what we got wrong:

Expecting inflation to only pick up “modestly.” Heading into 2021, we thought it was more likely that prices wouldn’t rise fast enough, or would actually fall—not that they’d rise too fast. After all, U.S. consumer prices only rose a paltry +1.4% last year—the smallest year-over-year increase since 2015—and the labor market was still in disarray. We acknowledged supply chain disruptions from de-globalization could put upward pressure on prices, but thought that process would play out over years, rather than months. Needless to say, that’s not what happened.

A highly adaptive U.S. consumer sent demand for goods soaring against already COVID-19-disrupted supply. Looking forward, we think we still have a few high prints ahead of us (today’s print showed inflation is running at 6.8% year-over-year). But as economic healing continues, and consumers shift their spending preferences from goods back toward services, we expect inflation to cool toward the Federal Reserve’s 2% target by the end of next year. Importantly, that’s still higher than it was in the last cycle, which ties with our outlook for a strong growth environment. This should give the Fed some leeway to wait for the labor market to make a more complete recovery before interest rate liftoff.

Percent change, year-over-year (%) This chart shows the year-over-year percent change of contributions of 5 themes to the U.S. CPI. In January 2021, shelter contributed 0.7%, autos 0.3%, re-opening -0.1%, energy -0.2%, and other 0.8%. In February 2021, shelter contributed 0.6%, autos 0.3%, re-opening -0.2%, energy 0.2%, and other 0.8%. In March 2021, shelter contributed 0.6%, autos 0.3%, re-opening 0.1%, energy 0.8%, and other 0.8%. In April 2021, shelter contributed 0.6%, autos, 0.6%, re-opening 0.6%, energy 1.5%, and other 0.9%. In May, shelter 0.7%, autos, 0.9%, re-opening 0.9%, energy 1.7%, and other 0.9%. Into the second half of this year, in June 2021, shelter contributed 0.7%, autos 1.3%, re-opening 0.9%, energy 1.5%, and other 0.9%. In July 2021, shelter contributed 0.7%, autos 1.3%, re-opening 0.8%, energy 1.5%, and other 1%. In August, shelter 0.8%, autos 1.2%, re-opening 0.7%, energy 1.5%, and other 1.1%. In September, shelter 0.9%, autos 1%, re-opening 0.7%, energy 1.5%, and other 1.3%. In October 2021, shelter contributed 1%, autos 1.1%, re-opening 0.8%, energy 1.8% and other 1.5%. Finally, in November 2021, shelter contributed 1.1%, autos 1.3%, re-opening 0.8%, energy 2.0%, and other 1.7%.

Calling emerging markets our top trade, and focusing on China. We thought global economic healing, a weaker U.S. dollar and growing exposure to technology would bode well for emerging markets this year. Yet, such economies struggled with vaccine distribution and lacked the policy space to cushion continued pressure on growth. The U.S. dollar also strengthened, making it harder to service debt.

The biggest thorn, though, unequivocally came from China, which faced a slew of headwinds, including stagnating growth, pressure on the property sector, regulatory scrutiny, and more recently, delisting concerns. The offshore MSCI China Index has lost -18% year-to-date. Chinese tech is down an eye-popping -28%. That weakness has brought broader emerging markets -4% lower this year, which makes it worth noting that ex-China, the group is actually up +9% (thanks to notable outperformance from India, Taiwan and Russia). To be sure, opportunities in emerging markets do exist, but it’s all the more important to be selective—onshore (domestic) China (which is more insulated from the regulatory and delisting risks), Taiwan and Korea are a few of our favorites to get exposure to in 2022.

Thinking rates would rise more than they did. At one point, we thought U.S. 10-year Treasury yields could finish this year around 2%, thanks to the early innings of the economic expansion, ongoing fiscal support, and again, “modestly” rising inflation. To be sure, rates did rise—from 2020’s lows of 0.50% to as high as 1.75%. Yet, lingering concerns around COVID-19, such as the Delta variant, slower Chinese growth, lack of commitment from the Fed to its new flexible inflation targeting framework, and technical factors such as forced unwinds biased yields lower. The 10-year sits around 1.50% today.

To be sure, low rates also created a supportive investing backdrop, fueling risk assets higher. Heading into 2022, we think improving growth and the Fed’s incremental removal of support should push Treasury yields to 2.15% by year-end. Once it does, core bonds could actually look compelling again.

U.S. 10-year Treasury yield (%) This chart shows the U.S. 10-year Treasury yield from 2020 to present, as well as J.P. Morgan Private Bank’s outlook into 2023. The 10-year Treasury yield began at 1.9% in early 2020. Then, COVID-19 fears dominated, sending yields falling again to a series low of 0.5%. It rose from there, landing at 1.4% by the end of November 2021. From here, our outlook for the 10-year Treasury yield in the fourth quarter of 2022 is 2.15%. The long-term range heading into 2023 stretches from 3% to 0.75%.

But hey, here’s what we got right!

Calling for stocks to reach new highs, with big thanks to earnings. The S&P 500 has made 66 new all-time highs this year—only 11 away from beating 1995’s record of 77. We said in our 2021 Outlook that high valuations were justified, and that has proven true. S&P 500 companies look on track to have generated over 45% earnings growth this year—the greatest since 2010. Margins—or the rate in which companies generate new earnings—are likewise at all-time highs. That has pushed the index +25% higher this year, despite the 5% decline in valuations. In short, embracing the optimism was the right move. Looking ahead, that pace is likely to moderate, but we still think U.S. companies can pull off another 15% earnings growth in 2022.

S&P 500 Index level This chart shows the path of the S&P 500 Index from January 2021 through December 7, 2021. The index started the year just above 3,700. By the end of January, the index had traded up to 3,850 before correcting back to 3,714 by the start of February. In January, the index posted five all-time highs. From there, the index climbed to 3,934 by the middle of February, then saw volatility on its way back down to 3,768 by the start of March. In February, the index posted five all-time highs. From March to early May, the index climbed to 4,232 with a few wobbles along the way. In March, the index posted five all-time highs. In April, 10 all-time highs. Inflation fears struck hard in May, sending the index to 4,063 by May 12. In the month of May, the S&P 500 marked one all-time high. Summer saw gains for the stock index with a few undulations along the way, until the S&P 500 hit a relative peak of 4,535 by the start of September. In June, July and August, the index posted eight, six and 11 all-time highs, respectively. Then, stocks tumbled throughout September to start October at 4,300. The index marked one all-time high in September and five in October. Upward momentum then continued, with the S&P 500 hitting an all-time high of 4,704 on November 18. Stocks sold off immediately following Thanksgiving, hitting a relative trough of 4,513 on December 1. Since then, stocks have recovered, standing at 4,677 as of December 7. To end the year, November marked seven all-time highs, and so far, none in December.
Balancing both cyclical and growth areas of the market. As recovery gave way to expansion, we shied away from defensive sectors and advocated for a balance between: 1) those stocks most-geared toward the economic cycle, and 2) those that stood to drive secular, above-trend growth. Here, we believed that megatrends such as digital transformation, healthcare innovation, and sustainability would continue to offer investors above-market levels of potential returns. That ended up being the right call. Technology and financials, for instance, have bested the S&P 500, while utilities and staples are at the very bottom of the pack. 
Price index (100 = December 31, 2020) This chart shows the price index of the S&P 500, S&P 500 Technology, S&P 500 Financials, and S&P 500 Consumer Staples from the end of last year to yesterday. All indices began at 100, denoting the price on December 31, 2020. From there, financials rose to 107 in mid-January before dipping to 98 by the end of the month. From there, financials rose to 130 by June 2021, with some bumps along the way, before dipping to 119 in the middle of the month. It rose again from there to 132 in mid-August 2021, dipped to 124 in mid-September, and rose again to a series high of 138 at the end of October 2021. Recently, it dipped to 127 in early December before rallying again to 132 on December 8, 2021. At the start, technology rose to 107 in early February 2021 before dipping to 97 in early March 2021. It rose again to 110 at the end of April 2021 before dipping to 101 in mid-May. From here, it climbed to 122 by early September 2021, dipped to 113 in early October 2021, before rallying as of recently to 133. Meanwhile, the S&P 500 climbed to 103 by the end of January 2021, before dipping along with the other sectors to 99 by the end of the month. It rose from here, with some bumps along the way, to 121 in early September 2021. It dipped at this point to 115 in early October, before rallying again to 125. Last week, it dipped to 120, yet as of recently, it rose to end the series at 125 on December 7, 2021. Finally, consumer staples fell from the start to a series low of 93 in early March 2021. It rose from here to 105 by early June. It remained relatively steady, marking 106 in early August 2021, and 108 in early September. It dipped at this point to 103 in early October. It rose to 109 at the end of November before dipping to 10 at the start of this month. The end of the series shows signs of a rally to 109 on December 8, 2021
We continue to advocate for such balance into the year ahead, and innovation is a key theme. Automation, capital investments and infrastructure spending are transforming industrials. Financials tend to benefit from rising interest rates. Digitization of all businesses remains a key driver of growth, and tech has led U.S. margin expansion for the past 20 years. Healthcare is growing more personalized, preventative and powerful.
Quarterly profit net margin, (%) This chart shows the net profit margin for the S&P 500 and the technology sector (within the S&P 500), from December 1996 to September 2021. The first data point came in at 6.9% for the S&P 500 and 6.6% for technology. From there, net margin profits for both indexes increased to 8.9% for technology and 7.3% for the S&P 500 by December 1998. Then, both declined to 7.8% for technology and 6.9% for the S&P 500, by June 1999. Here, the technology sector sharply rose to 12% by December 2000, while the S&P 500 had a moderate increase to 7.5% by March 2001. From there, the technology sector dived to -3.2% by June 2002, while the S&P 500 declined to 5% by June 2002. From there, both indexes rose, with the technology sector reaching to 12% by June 2006, and 9.4% for the S&P 500 by September 2007. Here, the technology sector rose a bit more to 12.4% by December 2008, while the S&P 500 dropped to 5% by September 2009. From there, both indexes rose to 16.7% for the technology sector and 9.2% for the S&P 500, by September 2011. From there, the technology sector rose to 19.1% by December 2017, before dropping to 14.9%, and then rising to a relative peak of 20.9% by March 2019. At the same time, the S&P 500 gradually rose to 11.35% by March 2019. From there, the technology sector declined to 19.3% by December 2020, while the S&P 500 decreased to 8.9% by March 2021. From there until recently, both indexes rose to 22% for the technology sector and 12% for the S&P 500
Reimagining the 40. The environment for traditional fixed income has been a challenge for investors globally. With rates at lows, traditional fixed income has offered less capital preservation and income than it has historically. That’s why we focused on opportunities to rethink traditional bond allocations in portfolios by giving up liquidity to generate income from real estate investments, or taking a little more risk by moving into the upper-tier portion of high yield bonds or preferred securities, for example. A look at returns across fixed income this year suggests that was the right call, and it’s one we continue into 2022:
Year-to-date returns (%) This chart shows the year-to-date total returns of 11 indices. EM sovereigns returned -1.5%. Euro IG returned -1.4%. U.S. IG returned -1.1%. EM Corporates -0.7%. Asia IG 0.0%. Munis +1.4%. U.S. BB +3.6%. Euro HY +4.2%. Preferreds +4.7%. U.S. HY +5.1%. Hedge funds +6.1%.

Finally, where do we go from here?

As we said in our recently released Outlook 2022, we believe the foundations have been laid for a more vibrant economic cycle ahead.

This means we favor stocks over bonds, and bonds over cash (our least favorite asset class). We expect double-digit earnings growth to drive stocks to new highs this year, and are still keen to couple growth areas of the market (such as technology and healthcare) with cyclical sectors (such as industrials and financials)—but particularly with a focus on those quality companies that can deliver despite short-term disruptions. Innovation is a key theme.

The environment is still challenging for core fixed income, but we can use dynamic active managers as a complement to navigate potentially turbulent fixed income markets. And given aggressive expectations for central bank rate hikes (the market is calling for 2–3 hikes next year, while we’re calling for one), we think investors have an opportunity to leg out of cash and into short-duration fixed income. Real assets can help investors add inflation protection to portfolios.

As always, your investment decisions should reflect your goals, investment horizon and risk tolerance. Working with your J.P. Morgan team to build the right portfolio for you is key. Here’s to another year of Top Market Takeaways ahead. Thank you for joining us on this journey; we’re grateful.

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All market and economic data as of December 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

This material has not been prepared specifically for Australian investors. It:

  • May contain references to dollar amounts which are not Australian dollars;
  • May contain financial information which is not prepared in accordance with Australian law or practices; 
  • May not address risks associated with investment in foreign currency denominated investments; and
  • Does not address Australian tax issues.

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JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("JPMS"), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states. Please read the Legal Disclaimer in conjunction with these pages.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

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