In our 2022 Outlook Commentary, we suggested policy accommodation had peaked last Fall such that markets would ultimately turn on investors as this year progressed, but in the short term, ample liquidity would enable stocks to be okay. We also wrote that our constructive outlook on energy commodities and the value versus growth factor style of investing would enable Canadian stocks to outperform U.S. equities. Then by mid-January, the Fed turned hawkish and ever since, most financial assets, especially U.S. growth stocks, have had a volatile and rough time.
Last Fall, we suggested policy accommodation had peaked and this inflection would catalyze a prolonged unwind of the multi-year outperformance of growth stocks versus value-based equities. This gradual process continued during the month of January. Then in last month’s commentary, we suggested inflation would be the key variable driving the outlook for the price of assets during 2022; an item that definitely remains the case today. Before delving into these stories and revisiting our outlook for 2022, let’s recap the tumultuous month of January.
December 2021 was a volatile month in financial markets, as the newly named Omicron variant entered our lexicon and FOMC Chair Powell turned hawkish, though, in the end, equities appeared non-plussed by either situation. The S&P 500 enjoyed its best December since 2010, while Canada’s TSX generated a total return of 3.06%. For the full year 2021, stocks had a banner year driven by the impact of fiscal and monetary stimulus on asset prices and a strong recovery in corporate profits. In reviewing the performance of the S&P 500, 434 issues gained for the year, 96 of which climbed more than 50%, seven declined more than 25% and all 11 sectors posted double-digit gains (up from seven in 2020, five of which posted double-digit gains). The top five performers accounted for 32.6% of the total return for the S&P 500, including Microsoft Corp (MSFT.US) at 9.7%, Apple Inc. (AAPL.US) at 8.1% and Alphabet Inc. (GOOG.US) at 7.4%. The one-year graph below highlights the negative correlation between the relative outperformance of growth to value (white line) stocks against 10-year bond yields (red line; note the inversion). This correlation remained strong until Q4 when the flow of funds, words from the Fed, and Omicron combined to disrupt this relationship.
Usually it’s March, but this year, thanks to Fed Chair Powell and Omicron, it was November that came in like a lamb and went out like a lion. Powell’s ‘broken record’ denial that inflation could become problematic, combined with the Fed’s ongoing printing of money, U.S. M2, up +37% since February 2020, a further +13% year-over-year in October, kept investors dancing into the 3rd week of November. As shown by the one-year indexed graph below, the big winners during this latest leg of the rally were the ‘macro cap’ tech stocks (white line). In fact, at the November peak in the S&P 500, the six stocks highlighted below accounted for 26.4% of the SPX and 50.7% of the NASDAQ-100.