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Markets Wrap Up 2021 Lower, but Solidly Higher for the Year



U.S. equities closed out 2021 on the downside, but all three major indexes registered solid gains on a yearly basis for the third-straight year, with the S&P 500 notching record highs 70 times along the way. Equity news and economic reports were in short supply and volume was light, but investors continued to assess the omicron variant, solid economic and earnings growth, rising inflation pressures, and the commencement of monetary policy tightening. Treasuries were mostly higher to apply modest downside pressure on yields, and the U.S. dollar traded lower, while gold gained ground and crude oil prices saw pressure. Asia finished mixed to close out the year, and Europe dipped in an abbreviated session, with several markets in both regions closed for the holiday.


The Dow Jones Industrial Average declined 60 points (0.2%) to 36,338, the S&P 500 Index lost 13 points (0.3%) to 4,766, and the Nasdaq Composite fell 97 points (0.6%) to 15,645. In light volume, 2.6 billion shares of NYSE-listed stocks were traded, and 3.3 billion shares changed hands on the Nasdaq. WTI crude oil moved $1.78 lower to $75.21 per barrel. Elsewhere, the gold spot price gained $17.10 to $1,831.20 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.4% to 95.59.

Markets were mixed for the week, as the DJIA gained 1.1%, the S&P 500 increased 0.9%, but the Nasdaq Composite ticked 0.1% lower. For the year, all three indexes posted gains for a third-consecutive time, as the DJIA was up 18.7%, the S&P 500 increased 26.7%, and the Nasdaq Composite advanced 21.4%.


Equity news was relatively quiet in the final session of 2021, which has seen the S&P 500 post a third-straight year of double-digit gains, led by the Energy and Real Estate sectors, which were nearly 47.0% and 43.0% higher, respectively. All sectors were comfortably in the green for the year with the Utilities sector the underperformer but still up almost 14.0%. The broad indexes saw strong gains but underneath the surface volatility was palpable as the markets grappled with multiple COVID-19 variants, surging inflation pressures, and a move by the Fed to ramp-up reining in its monetary policy accommodation. However, economic data has been strong, along with corporate earnings.


Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, Moving in Stereo: Churn and Rotations Causing Swings in Sentiment, where she acknowledges that 2021 has been a strong year for stocks, but with a lot of churn and sector volatility under the surface. She recommends using these short-term swings to your advantage via diversification and volatility-based rebalancing by trimming into strength and adding into weakness.


As noted in our latest Schwab Market Perspective: Why 2022 May Be a Better Year, as 2021 draws to a close, there are signs that the new year may be better than the last. The direction of COVID-19 variants remains difficult to predict, but another recent fear that has bedeviled the markets—inflation—may be about to ease. The narrowing of the performance gap under the broad stock market's surface emphasizes our strong bias toward high-quality factors such as strong earnings revisions, balance sheets, and cash flow. With sector swings and rotations still rampant, maintaining a factor-based (as opposed to sector-based) approach should allow for more stability and less violent swings in portfolios.


Find all our market commentary on our Market Insights page and follow us on Twitter at @SchwabResearch.


Economic calendar quiet in the final session of 2021


The economic calendar was void of any major releases to close out the year and Treasuries finished mostly higher for the day, as the yield on the 2-year note dipped 1 basis point (bp) to 0.73%, the 10-year note was flat at 1.51%, while the 30-year bond rate declined 2 bps to 1.91%.


The Treasury yield curve has flattened noticeably with the short end rising solidly amid the omicron variant uncertainty, and as the Fed announced that it will double the pace of tapering its monthly asset purchases and could raise rates three times in 2022. The pace of monetary policy tightening by the Fed is key to watch regarding the impact on the Treasury yield curve as discussed by Schwab's Chief Fixed Income Strategist, Kathy Jones in her latest article, Have Bond Yields Already Peaked for This Cycle?.

Next week the economic calendar will hit the new year running at full speed, delivering key reads on December manufacturing and services sector activity with separate releases from the ISM and Markit, as well the minutes from the Fed's December monetary policy meeting which will give us some details of its decision to accelerate the pace of tapering its asset purchases. Other reports that could move the market include, the November job openings and labor turnover survey(JOLTS), initial jobless claims for the week ended January 1, the November trade balance, and factory orders. However, the headlining report on the docket will likely be the end-of-the-week release of the December nonfarm payroll report. Finally, with the pace of monetary policy tightening potentially being the major point of contention for the markets in 2022, some late-week Fedspeak could also garner scrutiny.

Europe dips in light volume and an abbreviated session


European equities finished 2021 modestly lower in the final session of 2021 that saw markets in Germany, Spain, Italy and Switzerland closed, while the U.K. and France traded in an abbreviated session. The Stoxx Europe 600 Index finished the year with a nearly 22.0% gain, led by Banks and Technology sectors, while Travel and Leisure issues underperformed, registering about a 4.0% advance, amid the disruption from multiple COVID-19 variants that brought some reinstated restrictions. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his article, Omicron: Will the Virus Wave Pattern Repeat?, how we shouldn't necessarily expect this wave to unfold the same as the others. Jeff adds that the rest of the month may hold policymaker responses to what we don't yet know about omicron's effects, resulting in continued volatility. He also notes that this may be tempered by a potential delay in monetary policy tightening and a backdrop of strong global economic growth. The markets showed some resiliency in the face of the surge in inflation pressures that was fueled by the global supply-chain challenges, and pivots from some central banks to move toward tightening monetary policy, with the Fed accelerating its tapering campaign and the Bank of England surprisingly raising rates this month. However, economic and corporate earnings growth remained solid. The U.K. FTSE 100 Index and France's CAC-40 Index both decreased 0.3%.

Asia mixed to close out a choppy 2021


Stocks in Asia finished mixed, as focus on the omicron variant remain amid the rapid spread compared to previous variants but it appears the severity has been muted. However, volume was lighter than usual, with markets in Japan and South Korea closed for the holiday. Asian markets have seen a mixed year, with Japanese and Chinese stocks posting gains, while South Korean and Hong Kong markets saw red. Indian markets led the way, rising nearly 22.0% and Australia was also an outperformer, gaining roughly 13.0%. The moves came amid China's regulatory crackdowns, major central banks moving down the path to monetary policy tightening, multiple COVID variants, supply chain disruptions and the ensuing inflation pressures, and this year's rally in the U.S. dollar.

Schwab's Jeffrey Kleintop touches on how future COVID waves may not resemble those of 2021 in his latest article, Top Global Risks of 2022, while also offering four additional risks, in no particular order: shortages turn into gluts, rate hikes slower than expected, China goes from cracking down to propping up, and geopolitical surprises. Whether or not these risks come to pass remains to be seen, Jeff adds, but a new year almost always brings new surprises.

The last day of the year culminated with some key economic reports, with China reporting that its official Manufacturing and Non-Manufacturing PMIs saw growth in both sectors unexpectedly accelerate for December. China's Shanghai Composite Index increased 0.6% and Hong Kong's Hang Seng Index rallied 1.2%. Elsewhere, India's S&P BSE Sensex 30 Index finished 0.8% higher, and Australia's S&P/ASX 200 Index fell 0.9%.

Next week's international economic calendar is poised to begin the new year with some key December manufacturing and services sector output reports, with releases out of Australia, China, India, Japan, the Eurozone, and the U.K. Other reports that could gain global market attention include: India—2022 GDP annual estimate. Japan—household spending, labor earnings, and Tokyo consumer price inflation. Eurozone—preliminary consumer price inflation statistics, retail sales, consumer confidence, and economic confidence, along with German retail sales, factory orders, unemployment change, trade balance, and industrial production.

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