2021 was a great year for investors. The economic recovery continued, corporate earnings improved, and investors in high-quality American businesses did well. Looking into next year, there are still plenty of reasons to be optimistic about stocks.
The Economic Expansion Will Continue
Unfortunately, widespread vaccinations haven’t been enough to put an end to the COVID pandemic. However, the economic impact of the virus this year was far less than the 2020 wave. Future COVID waves might be significant public health challenges, but they won’t be enormous economic ones.
The Federal Reserve is set to tighten monetary policy, which should help ease inflationary pressures. New unemployment claims have reached pre-pandemic levels. Consumer spending continues to increase. Although the personal savings rate has returned to pre-pandemic levels, consumers are still not borrowing at the same rate as they were pre-pandemic. The net worth of American households is higher than it’s ever been. Consumer spending is about 70% of the economy, and all signs point to healthy consumers who can and will continue to spend money.
History and all the economic data tell us that the expansion which started in April of 2020 is likely to continue.
Earnings Will Continue to Grow
Most importantly for long-term investors, earnings will continue to grow. History shows that once an economic expansion begins, both earnings and profit margins tend to improve. When the final numbers for 2021 are in, S&P 500 companies will likely report earnings that are 25% higher than they were in 2019. If you want to understand why the markets have performed so well over the past two years, just look at the earnings!
If you want to understand why the markets have done well over the past two years, just look at the earnings.
While earnings are 25% higher than they were pre-pandemic, many companies have been reluctant to return capital to shareholders. This is a normal response to economic uncertainty. Although earnings are up 25%, dividends have only risen 12%, and stock buybacks have just now reached 2018 levels. As concerns about future waves of the virus subside, companies will be more willing to return capital to shareholders, rewarding investors who have been following the fundamentals.
The markets and the economy are cyclical, but the ups and downs are part of a bigger picture. For long-term investors, the big picture is clear: investing in the stocks of great American businesses is still the best way to create and protect wealth.
Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer