The S&P 500 Index is up approximately 25% for the year, which currently ranks it as one of the best years ever, certainly something to be thankful for in 2021. Although this year has not been perfect, earnings have come in substantially better than expected, with 2021 S&P 500 earnings expectations up nearly 25% from where they were at the start of the year, helping to justify stocks at current levels. If the S&P 500 were to end at these levels, it would rank as the 15th best year since 1950. The S&P 500 is on pace to be up at least 15% for three consecutive years for only the second time in history, exceeded only by an incredible streak of five in a row in the late 1990s.
This year has seen the second most all-time highs ever for the S&P 500, another reason to be thankful. The 68 all-time highs this year put 2021 above the 65 new highs in 1964 and second only to the record 77 new highs in 1995. Will 2021 get to 78 and a new record? That may not happen, but there is the potential for further gains ahead through year-end.
Although we have not been able to put COVID-19 fully in the rearview mirror in 2021, the most powerful engine in the US economy—the consumer—has remained remarkably strong. Despite the lingering effects of the virus, inflation fears, and absence of stimulus checks, the U.S. consumer continues to spend. Last week was a stark reminder of that, as October retail sales showed the strongest month-over-month growth since March, besting economists’ expectations across the board. Retail sales have now climbed in six of the past eight months, so far shrugging off worries that consumer demand would drop off without additional fiscal stimulus.
Results from corporate America paint a similar picture. Retailers, including Home Depot, Lowe’s, and Target, all reported earnings last week that came in above analysts’ expectations. The consumer discretionary sector is tracking to a 58% year-over-year increase in earnings for 2021, and that strength could continue into next year and fuel an increase in 2022, greatly exceeding the expected earnings growth rate for the broader market.
It is important to note that consumer confidence has fallen since the summer and has yet to recover to pre-pandemic levels. It would be nice to see consumer confidence turn higher in the near term, but it is more important to watch what consumers are doing with their money, rather than how they feel. Excess savings, rising wages, a strong wealth effect from stock market gains, and high housing values should help to fuel strong spending this holiday season and into next year.
Thanks to a combination of continued healthy earnings, adaptable U.S. corporations and workforces, a solid U.S. consumer, and the tailwinds of both monetary and fiscal policy, stocks should do well in 2022, outperforming bonds once again.
The third reason to be thankful is that a big year for stocks has historically meant the following year could be strong as well. The past nine times the S&P 500 was up at least 20%, the following year saw positive returns. The year after a 20% gain has averaged a solid 11.5% return and been higher 16 out of 19 times. After the run we have had the past few years, an 11.5% return next year would still make most investors smile.
Things have not been easy the past 20 months. But as investors, we should be extremely grateful for how strong 2021 has been. The bull market for stocks may continue into 2022. The U.S. consumer is the biggest key to how the economy will do going forward. Should consumer spending surprise to the upside, it will help drive solid growth next year.
The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To determine which investment(s) may be appropriate for you consult your financial advisor.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Data provided by LPL Financial and the Bureau of Economic Research.
- Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses.
- The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.