• Happy New Year!  I hope you and your families had a wonderful and healthy holiday – and that you’re not stuck in any airports! It’s been a cold start to the year in Omaha. 
  • The US stock market closed the year with another positive week last week. Small caps outperformed, as did Value stocks. 
  • Last week Ten Year Treasury Yields gained 2 basis points to close the year at 1.51%.  10-Year US Treasuries opened in 2021 at 0.94%.  As of this writing, yields are at 1.56%, which is its highest level since late November.
  • The US stock market was up nearly 4% for December and nearly 9% for the fourth quarter.  The overall US stock market was up nearly 26% for 2021.
  • According to Old Mission Capital, in 2021 the large cap S&P 500 index was up nearly 27% and beat the granddaddy Dow Industrials by over 8% and the NASDAQ by more than 5%. It was the widest margin in the past 24 years and only the sixth time the S&P has beaten both the Dow and NASDAQ in the same year.
  • According to the Bank of America, the S&P 500 was up 11 of the past 13 years in the first week of the calendar year, with an average gain of about 1.6%.
  • My high conviction call last year was that the “average stock” in the US stock market would have a good year.  They did. They were up nearly 22%.  An even higher conviction view on my behalf was that the average stock would beat the overall market. That didn’t work out.  Since COVID-19 cases started to increase again last summer, the overall market was up nearly 10% since the end of June while the average stock lost nearly 1%.
  • On that last point, Goldman Sachs' chief U.S. equity strategist David Kostin points out the five largest S&P 500 stocks at the start of 2021 (Facebook, Apple, Amazon, Microsoft, Google) collectively returned 37% last year, and now account for 23% of the index.  Active managers, in the aggregate, are underweight these names and should start to outperform when these names start to lag.
  • Heading into the New Year, the short-term outlook looks promising, due in part to the “January Effect” — the perception of a seasonal rise in U.S. equities during the first month of the year.
  • Regarding COVID-19, none of the key stats are improving yet.  The only encouraging thing is that Omicron, while still dangerous, isn’t causing the same spike in deaths as in case counts.  For more: First Trust COVID Tracker.
  • Last year was a special year for the stock market. Here are some quick stats from Goldman Sachs:
    •  2021 capped the best 3-year (and 5-year) stretch for S&P since the late 1990s; other than the tech bubble, you have to go back to the 1930s to find a better 3-year stretch than what we just enjoyed.
    • The S&P 500 rose by 27%.  If you include dividends the total return was 29%. This ranks in the 85th percentile of all annual returns since 1962.
    • Realized volatility was 13% which ranks in the 49th historical percentile. 
    • Putting those together, the ratio of S&P return-to-vol was 2.2, ranking in the 83rd historical percentile and 2x the historical average.
    • The largest S&P peak-to-trough drawdown during the year was just 5%, the mildest in 25 years except for 2017.
    • The market traded higher on 57% of days in 2021, ranking in the 81st percentile since 1962.  The median gain on those days was 48 bps, ranking in the 47th percentile. 
    • 88% of S&P stocks posted positive returns, including 306 names up 20% or more and 101 names up 50% or more.  On the other side, 12 stocks closed down more than 20% and zero names were down 50% or more.  Despite strong full-year returns, however, 175 stocks ended the year 10% below their YTD highs, and 67 names are more than 20% off their highs.
    • The NASDAQ returned 28% - lagging the S&P by 120 bps and ending 4 years of outperformance. 
    • US Treasuries 10-year notes returned -4%, ranking in just the 8th percentile. The 33 percent point spread between the S&P and US Treasuries returns ranked in the 95th percentile.
    • The best sector returns were energy +55%, real estate +46%, and financials +35%.
    • The worst sector returns were utilities +18%, consumer staples +19%, and industrials +21%. 
    • The best global markets (in local FX) were Venezuela +350%, Argentina +63%, and the Czech Republic +45%.
    • The worst global markets were China's H-shares -21%, Brazil -12%, and Hong Kong -12%.
  • While it wasn’t a good year for bonds (a rare loss for the overall bond market of about -1.5%), other Diversifiers had strong years.  Alternatives (as defined by the Morningstar Diversified Alternatives Index) were up nearly 10%. Real assets were up even more.  Commodities (Bloomberg Commodity Index) were up over 27%.  US Real Estate (MSCI US REIT Index) was up over 43%.  With all that said, if you knew in advance that inflation would be at multi-decade highs and commodities were up nearly 30%, would you have guessed gold ending the year lower, silver (-12%) having its worst year since 2014, and platinum down over 10%? There’s no way I would have!
  • Want some more good bullets? Check out Ben Carlson's favorite charts of 2021.  Lots of tasty short ideas.
  • Here are some more stats from Goldman Sachs: "when the market goes up 25%+ for the year (which has been 15 times since 1950)" (i.e. as in for instance: 2021)
    • It never did better the following year.
    • But it was positive most of the time (86%)
    • And there were some solid follow-on years (with a median of 13%)
  • Some investors are concerned about investing now because the market is basically at all-time highs. I get it, I love buying stuff on sale, but did you know that investing on the worst day each year would have produced an annualized return of nearly 8% (Morningstar Direct, December 2021)? Please note, this data doesn’t include the 2021 data. Meanwhile, staying in cash would have returned 1% per year? More nuggets like this are in the OPS Quarterly Reference Guide.
  • Here’s an interesting (and not so positive) stat from Bloomberg last week (hat tip to Jesse Felder): “Last week, when the S&P 500 closed at a 52-week high, 334 companies traded on the NYSE hit a 52-week low, more than double the amount that marked new one-year highs. That’s happened only three other times in history – all of them in December 1999”.
  • This week’s economic schedule has something every day, but the big number is December’s Employment Report on Friday. There were 120,000 jobs added in November, and the unemployment rate was at 4.2%.  The consensus is for 400 thousand jobs added in December, and for the unemployment rate to decline to 4.1%.
    • The current estimate for 4Q21 GDP, according to GDPNow, is 7.6%. 
  • Investor sentiment, at least measured by the  AAII Sentiment survey, ended the year basically at its long-term average. Not really a signal either way.
 Crypto Corner – Grant Engelbart, CFA, CAIA, Sr. Portfolio Manager
  • Major coins slumped last week, with Bitcoin falling 7%, Ethereum just under 7%, and Solana falling nearly 12%.
  • Bitcoin broke below $50,000 early in the week and never recovered, trading around $47,000 Sunday night.
  • Bitcoin returned 65% in 2021 despite a rough December. Ethereum soared 408%, and the third-largest coin by market cap – Binance Coin – rose a whopping 1,300% last year.
  • The news was light unless you count celebrities buying NFTs.
  • The chairman of the SEC, Gary Gensler, assembled a crypto oversight team as the agency prepares to further regulate the industry.
  • No new digital asset-focused ETFs launched in recent weeks, but 2021 was a banner year for the space. At least 15 products focused on cryptocurrency, blockchain technology, or digital assets were launched last year. The largest digital asset-focused ETF, Amplify Transformational Data (BLOK), returned over 31% last year.
  • This coming week’s guest on Orion's The Weighing Machine podcast will be repeated guest Jay Jacobs from GlobalX. This was a cool interview as GlobalX, a leading ETF provider, does a lot of cool things – including their 2022 Outlook called “Charting Disruption”, which includes a sleek website.  Some highlights from the interview include quick talking points and robotics, AI, EVs, blockchain, digital assets, climate change investing, the digital economy, and much more.
  • Speaking of outlooks, a favorite of many on Wall Street and Silicon Valley is Professor Scott Galloway – who has an accessible and thought-provoking communication style.  It doesn’t hurt that he’s right more than his share.  Here’s his 2022 Outlook, which includes a review of his calls a year ago.
  • Another Wall Street and Silicon Valley favorite is Peter Diamandis.  Here are his  10 longevity resolutions for 2022.  
  • Speaking of resolutions, another source of ideas is the weekly email from James Clear (whose book “Atomic Habits” was the #1 best-selling book of the year on Amazon) is super short and very tasty each week.
  • And once you have your resolutions, here is Ryan Holiday’s (another tasty daily/weekly email writer, including The Daily Stoic)  The Secrets To Better Habits in 2022.
  • Given the recent cold and snow, it’s awesome to see a sunny warm day with stingrays and herons enjoying the early morning.
  • “An investor who has all the answers doesn’t even understand all the questions.” Sir John Templeton
  • Thanks for reading and have a great week!  For more resources, please check out the Financial Advisor Success Hub, and as always, please let us know what we can do better at rusty@orion.com or ben.vaske@orion.com.
  • Happy New Year!
0006-OPS-1/4/2022

The CFA is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute — the largest global association of investment professionals. To learn more about the CFA charter, visit www.cfainstitute.org.

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