2022: Following up on another record year

Mike Loewengart, Managing Director of Investment Strategy

E*TRADE Capital Management


A year ago, plenty of people argued the US stock market was likely to cool off a bit in 2021 after its record-setting rally off the March 2020 lows. A year later, the mercury is about as high as it’s ever been.

Despite bouts of volatility amid new COVID variants, rising inflation and interest rates, stubborn supply chain issues, and continued partisan squabbling on Capitol Hill, the retrenchment never came—2021 turned out to be one of the strongest years for US stocks in the past five decades.

The New Year begins with some new themes appearing on the horizon—uncertainty surrounding the White House’s infrastructure and climate spending package, the prospect of the Fed’s first rate hikes since 2018, and potential midterm election year volatility, among others.

But some of the factors that emerged last year may provide some useful insights into what 2022 may have in store for the markets.

US equities

Despite some late-year volatility—driven mostly by inflation concerns and the emergence of the Omicron variant—the S&P 500 logged its seventh-biggest gain since 1972 and hit a record high every month. It was also the first year since 2016 that the S&P outperformed the tech-heavy Nasdaq Composite. After leading the market early in the year, the small-cap Russell 2000 trailed the field, returning just a little more than half of what the S&P did:

2021 US equity performance

FactSet Research Systems


The energy sector was the year’s biggest gainer, riding a rally in crude oil prices (which were up as much as 75% for the year in late October) to reverse a three-year trend as the weakest corner of the S&P 500. Real estate, financials, and tech were also strong, while the relative underperformance of two defensive sectors, utilities and consumer staples, highlights the “risk-on” mindset that seemed to dominate much of the year:

2021 sector performance

FactSet Research Systems

International equities

International stocks underperformed the US market by a wide margin in 2021, and emerging market performance was downright bad, especially toward the end of the year. Possible contributing factors to emerging-market weakness: Chinese regulatory crackdowns, COVID disruptions, and unexpected strength in the US dollar. Although the MSCI EAFE Index of developed markets finished 2021 with a double-digit percentage gain, the MSCI Emerging Markets Index peaked in February and ended the year in the red:

2021 international equity performance

FactSet Research Systems

Fixed income

Overall, bond prices struggled last year as yields (which move inversely to prices) rose. But comparing the yield curve from a year ago, mid-2021, and last Friday highlights 2021’s primary trend: The curve flattened significantly, mostly because shorter-term rates rose more than long-term rates, which in large part reflected expectations the Fed would increase interest rates. The benchmark 10-year T-note yield ended 2021 at 1.51%, up significantly from 0.092% at the end of 2020, but well below last year’s high near 1.75%:

US Treasury yield curve as of December 31, 2021

FactSet Research Systems

Looking ahead

While it’s tempting to think the markets start fresh every January, many of the issues that drove markets in 2021—especially toward the end of the year—may continue to play a significant role in 2022. Here are a few themes to keep in mind:

  • Expect volatilityacross all asset classes. Through the end of 2021 the S&P 500 had gained 84% since March 2020—its biggest 21-month gain of the past 60 years—and never pulled back more than 6% last year. Don’t expect to see that same kind of one-directional market going forward—the volatility that emerged in the latter portion of 2021 could be the template for the foreseeable future, in equities as well as other assets.
  • Look past the usual suspects. In light of the particularly strong run in US stocks, investors may want to consider casting a wider net. There’s a good chance the “usual suspects” won’t drive returns going forward, so pay attention to areas that have been ignored or overlooked over the past year or so, such as value and international stocks.
  • Could inflation ease? Inflation was at or near the center of the market conversation last year, but this year brings the possibility it could retreat. The Fed is expected to act aggressively (having already set the table for three rate hikes this year), although that could change as the markets adjust. (Morgan Stanley & Co. strategists have also argued that inflation could peak and pull back this year.1)

Regardless of how the market environment changes, one thing that should remain constant in 2022: A commitment to staying the course and maintaining the type of diversified portfolio that can help investors build wealth over the long-term, regardless of the inevitable surprises that emerge in any given year.

Thanks for reading, and we’ll talk to you again next month.

Mike Loewengart
Managing Director, Investment Strategy, E*TRADE Capital Management, LLC

Mike Loewengart is the Managing Director of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen, CFA
Executive Director, Morgan Stanley WM Global Investment Office

Andrew Cohen is an Executive Director in the Morgan Stanley Wealth Management Global Investment Office and an investment strategist for ETCM LLC. Prior to joining E*TRADE, he was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a Chartered Financial Analyst (CFA®) charterholder and a member of the CFA Institute and CFA Society New York. He is a graduate of Virginia Tech with a Bachelor of Science (B.S.) in finance.

What to read next...

Find out about the competing market themes that may play out as we head toward the end of the year.

A look at what drove the markets in September, and what's on the horizon heading into October.

Looking to expand your financial knowledge?