A Look Back at 2021 Thus Far
The year in brief. As I look back on the year 2021, I view it as a year of economic and business recovery – a recovery tempered by the delta variant of the coronavirus, but a rebound nonetheless.
Stateside economic indicators were largely up this year, some strikingly so.1 As more industries opened up fully in the first half of the year, pent-up consumer demand for goods and services grew quickly, but supply could not keep up in many sectors. Inflation made a comeback, and analysts were divided on whether it would decline in the near term or persist at elevated levels. Cheap oil became a memory, along with cheap gas. Congress spent much of the year trying to compromise on a multitrillion-dollar infrastructure bill, and more recently started working on debt limit and budget legislation. Around the world, supply-chain issues and ongoing vaccination efforts tempered global growth.
The U.S. economy. On the whole, consumers ramped up their spending in 2021, and that boosted gross domestic product (GDP). The economy expanded at a 6.3% annualized pace in the first quarter, then 6.7% in the second; the Conference Board and the Federal Reserve Bank of Atlanta respectively see 3.5% and 1.3% annualized GDP for Q3, given the summer drag from the delta variant.1,2
A rush of pent-up cash and stimulus payments contributed to a personal spending surge this spring – a record 12.0% jump in the second quarter. Federal spending hit a 4.2% annualized pace in Q1, also playing a role in this year’s economic resurgence.3
The jobless rate continued to decline from its recent peak of 14.7% (April 2020). The Department of Labor measured 6.3% unemployment in January; by September, there was just 4.8% joblessness, and 7.7 million people out of work. Those numbers still lag behind February 2020, when there was 3.5% unemployment and 5.7 million people without jobs.3,4
Federal government data showed consumer inflation hitting 5.4% in September. The Federal Reserve made no benchmark interest rate adjustments despite this year’s inflation pressure. At its September meeting, however, it did decide to gradually reduce its monthly purchases of securities and bonds, and plot a mid-2022 end to its current economic stimulus campaign. The CME Group’s FedWatch tool, a private-sector barometer of the probability of benchmark interest rate moves, projects the central bank making at least one rate increase by September 2022.4
The global economy. The International Monetary Fund estimates global GDP of 5.9% for 2021 followed by 4.9% expansion next year. Among its 2022 nation-specific growth forecasts: 5.2% for the U.S., 5.6% for China, 4.3% for the euro area.5
Manufacturing slowdowns and trade issues linked to the pandemic dented China’s economy this summer. The Republic’s official Q3 GDP estimate was 4.9%, a setback from the 7.9% yearly growth pace in Q2. The same issues affected the euro area, where inflation rose to a 13-year peak in September.6,7
Global demand for oil strengthened this year as key economies returned to full speed. An oil rally gained momentum, taking the price of WTI crude above $84 in late October (a 7-year high). The price of Brent crude, the global benchmark, concurrently topped $86 (a 3-year peak). Retail gas prices rose during 2021 as well.8
Looking back, looking forward. Here in Q4, investors are witnessing what may be a very strong earnings season. As of October 22, 23% of S&P 500 member companies had reported third-quarter results, with the blended earnings growth rate for the S&P 500 at 32.7%, according to stock market analytics firm FactSet.9 The blended earnings growth rate combines actual results for companies that have reported and estimated results for companies that have yet to report.
If that percentage holds, it will be the third-highest year-over-year earnings growth rate for the index since 2010. What concerns Wall Street is the guidance. Companies are dealing with higher costs than they were a year or two ago, some stemming from inflation, others resulting from supply chain interruptions and COVID-19; that could hurt 2022 earnings.9
The inflation pressure we see now may persist well into 2022. Less bond buying from the Fed means less liquidity in the financial markets – and a rate hike could occur next year.
Some analysts are fretting about these factors and their possible impact on equities, but in the big picture, the Federal Reserve sees 3.8% growth for the economy in 2022. If that proves true, it would be the second-best GDP number since 2004. Consumer spending, the housing market, and the job market have all appear to have momentum, and may retain that strength into 2022.3
As a reminder, fall and winter can be volatile on Wall Street, and short-term volatility does not always warrant a reaction. Experienced investors with an eye on the long term know that volatility is part of the investing process, and investors who have a shorter term horizon need to consider their risk tolerance and overall investing goals.
Brian Wyatt may be reached at 360-386-9887 or firstname.lastname@example.org.
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1. Bureau of Economic Analysis, October 23, 2021
2. Conference Board, October 13, 2021
3. Bankrate, October 14, 2021
4. Bureau of Labor Statistics, October 8, 2021
5. International Monetary Fund, October 12, 2021
6. The Conversation, October 21, 2021
7. U.S. News, October 22, 2021
8. CNBC, October 24, 2021
9. FactSet, October 22, 2021