The year ended on a high note for the Dow and S&P 500 despite economic challenges posed by the coronavirus and extreme weather events.
While the traditional end of year Santa Claus equity rally may not have been as pronounced as we typically see, it may have just come early. Thus far, we’ve seen both the Dow Jones Industrial Average and the S&P 500 notch new highs in December with underlying market sectors firmly in the green.
Despite the challenges posed by coronavirus variants and extreme weather events, 2021 saw the best economic growth since 1984, muted market volatility and the S&P 500 delivering a return of approximately 27% over the course of the year. Raymond James Chief Investment Officer Larry Adam expects inflation to peak by early next year, which should alleviate pressure on the Federal Reserve (Fed) in the upcoming tightening cycle and would be supportive of domestic equity markets overall. The situation remains fluid, but there’s general optimism that the global reopening will continue and inflationary pressure will subside. Both will be key factors for markets, economic growth and corporate earnings throughout 2022.
This year-end equity boon didn’t come easy. We saw some volatility amid faltering negotiations to advance President Biden’s Build Back Better legislation and rising geopolitical tensions between Russia and the Ukraine, which have the potential to escalate in the near term. We believe that U.S. lawmakers may eventually unlock a deal in the new year, says Washington Policy Analyst Ed Mills. However, investors can expect to see short-term economic headwinds emerge in the meantime, and consumer sectors may stumble as the monthly child tax credit payments are set to expire as well.