Thrivent Asset Management Contributors to this report: Steve Lowe, CFA, Chief Investment Strategist; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Model Portfolio Manager

Year two of the COVID-19 pandemic was marked by encouraging economic growth and employment recovery, along with continued strong performance of the U.S. stock market.

On the flip side, however, inflation surged, supply bottlenecks led to shortages across a number of industries, and the pandemic continued to be a drag on small businesses.

Oil prices rebounded during 2021, with travel by air and automobile picking up as the economy recovered. The price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, moved up 55.01% for the year, closing 2021 at $75.21 per barrel.

U.S. manufacturing activity has continued to thrive, according to the Manufacturing Purchase Managers Index report issued January 3 by the Institute for Supply Management (ISM). Economic activity in the manufacturing sector achieved overall growth in December for the 19th consecutive month. According to the report, “all of the six biggest manufacturing industries — Chemical Products; Fabricated Metal Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Transportation Equipment; and Petroleum & Coal Products, in that order — registered moderate-to-strong growth in December.”

In addition, the report added that “the U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, with indications of improvements in labor resources and supplier delivery performance.” However, the report acknowledged that “shortages of critical lowest-tier materials, high commodity prices, and difficulties in transporting products continue to plague reliable consumption.”

Interest rates rose in 2021 in response to stronger growth and inflation, with the yield on 10-year U.S. Treasuries climbing from 0.92% to 1.51%. Rates are expected to continue to rise in 2022, as the Federal Reserve (Fed) attempts to constrain rising in inflation.

Drilling down

U.S. stocks post big year

The S&P 500® Index was up 4.36% for the month of December, up 10.65% for the 4th quarter, and up 26.89% for the year, from 3,706.57 at the end of 2020 to 4,766.18 at the end of 2021. The total return of the S&P 500 (including dividends) was up 4.48% December, 11.03% for the 4th quarter, and 28.71% for the year. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)

The NASDAQ Index was up 8.28% for the 4th quarter and 21.39% for the year, from 12,888.28 at the end of 2020 to 15,644.97 at the close of 2021. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales edge up

Retail sales rose 0.3% from the previous month in November, and 18.2% above November 2020, as businesses continued to rebound from the pandemic slowdown, according to the Department of Commerce retail report issued December 15. Total sales for the three-month period of September through November were up 16.2% from the same period a year ago.

Building material sales were up 0.7% in November from the previous month and up 9.3% from a year earlier, while department store sales were down 5.4% for the month but up 24.9% from a year earlier. Auto sales were unchanged from the previous month but up 13.3% from a year earlier. Non-store retailers (primarily online) were also unchanged for the month, but up 12.1% from a year earlier.

With consumers returning to restaurants and bars, sales at food services and drinking establishments were up 1.0% from the previous month, and up 37.4% from a year earlier.

Best-ever employment year ends with a thud

The U.S. economy added only about 199,000 jobs in December, which was about half the number economists had projected. But the unemployment rate dropped by 0.3% to 3.9% – the lowest level since the pandemic began – according to the Employment Situation Report issued January 7 by the Department of Labor (DOL). That compares with a 6.7% unemployment rate at the end of 2020.

For the year, the economy added 6.4 million jobs, the most since 1939 when the DOL began keeping records – with job gains recorded every single month of the year. The low number of new jobs reported in December was surprising since an ADP Employment Report issued earlier in the week estimated more than 800,000 new private sector jobs for the month.

One contributing factor to the disappointing total was the high number of workers who have been leaving their jobs. In November, for instance, a record 4.5 million people quit their jobs, although many of them left to switch to other jobs, according to the DOL. While 4.5 million people quit, businesses hired 6.7 million new workers during the same month.

The leisure and hospitality industry added 53,000 jobs in December and 2.6 million in all of 2021. Professional and business services added 43,000 jobs in December, while manufacturing added 25,000 jobs.

Average hourly earnings for all employees on private nonfarm payrolls rose by $0.19 to $31.31 in December, a 4.7% increase over the December 2020 pay rate of $29.81.

Energy & Real Estate lead all sectors

The Energy sector of the S&P 500 was up 54.64% in 2021 to lead all sectors, while Real Estate was up 46.19%. Other leading sectors included Financials, up 35.04% for the year, Information Technology, up 34.53%, and Materials, up 27.28%. All 11 sectors posted double-digit gains for the year.

The chart below shows the results of the 11 sectors for the past month, past quarter, and all of 2021:

Treasury yields rise in 2021

Bond yields barely budged in December, with the yield on 10-year U.S. Treasuries up just 0.02% for the month. But for the year, the yield climbed 0.59%, from 0.92% at the end of 2020 to 1.51% at the close of 2021.

Corporate earnings still climbing

Corporate earnings expectations continued to rise in the 4th quarter – as they have throughout 2021 – as the economy recovered. The 12-month advanced earnings per aggregate share projections for the S&P 500 moved up 6.05% in the 4th quarter. Through all of 2021, advanced earnings projections jumped 35.87%.

Forward P/E ratio dips in 2021

Even with the stock market’s strong performance, the forward price-earnings ratio (P/E) of the S&P 500 declined slightly during the year, from 22.46 at the close of 2020 to 20.96 at the end of 2021, thanks to the big gains in corporate earnings.

For the 4th quarter, however, the forward P/E edged up modestly. Although the forward P/E was down from 2020, it was still higher than the 2019 closing level of 18.18 and the 2018 closing level of just 14.40. If the outlook for corporate earnings continues to improve, that could help hold the line on the P/E level.

The forward 12-month earnings yield for the S&P 500, which is the inverse of the P/E, ended the year at 4.77%, which is down from the 3rd quarter yield of 4.98%. However, it was slightly higher than the year-end 2020 yield of 4.45%. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. Although the yield is about 2% lower than it was two years ago, it is still significantly higher than the 1.51% market rate of 10-year U.S. Treasuries.

Dollar gains vs. Euro and Yen

The dollar appreciated 1.88% versus the Euro in the 4^th quarter and it appreciated 7.06% versus the Euro for the year. The strength of the dollar this year has been attributed, in part, to the relatively quick economic recovery that the U.S. has made from the pandemic compared with most other countries.

The dollar appreciated 11.54% versus the Yen in 2021, and it was up 3.21% versus the Yen in the 4^th quarter.

Oil prices rebounded in 2021

With global travel picking up, oil prices surged in 2021. The price of West Texas Intermediate jumped 55.01% for the year, from $48.52 at the end of 2020 to $75.21 at the close of 2021.

Gasoline prices also moved up significantly in 2021, with the average price per gallon up 46.04% for the year. However, the price declined slightly in the 4^th quarter, from $3.49 per gallon to $3.38.

Gold prices slip

Despite rising inflation, gold prices declined 3.51% in 2021, from $1,895.10 at the end of 2020 to $1,801.90 at the close of 2021. But the price did rise 4.08% in the 4^th quarter as inflation concerns intensified.

International equities rise

International equities moved up in 2021, although the gains were well below the U.S. market. After a fast start to the year, the MSCI EAFE Index was relatively flat through the second half of 2021, as COVID-19 cases entered a second wave. For the year, the index, which tracks developed-economy stocks in Europe, Asia, and Australia, was up 8.78%, from 2,147.53 at the end of 2020 to 2,336.07 at the close of 2021.

What's ahead for the economy and the markets? See: 2022 Market Outlook, by Steve Lowe, Chief Investment Strategist, Thrivent Asset Management.