The U.S. stock market's major indexes posted double-digit gains in 2021 as investors cheered the economic recovery and looked past continuing uncertainty wrought by the coronavirus heading into the new year. It was a third-straight year of growth.
The celebratory end to 2021 on Wall Street contrasts sharply with the slump felt by millions of Americans contending with the rampant spread of the highly transmissible omicron variant. As the pandemic enters its third year, the nation also is facing challenges on the economic front, with inflation soaring to near 40-year highs and the labor market wobbling as fresh covid outbreaks shut down businesses and worry consumers.
But even omicron doesn't appear to have dampened the mood among investors, as the markets continued to exhibit the strength they have shown throughout much of the pandemic.
The major indexes were flat Friday, 2021's final day of trading. The S&P 500 finished with a gain of 26.89% for the year, or a total return of about 29%, including dividends. That's nearly as much as the benchmark index gained in 2019. The Nasdaq composite, powered by Big Tech stocks, climbed 21.38% in 2021. The Dow Jones Industrial Average gained 18.72%, with Home Depot and Microsoft leading the way.
"It's the third year in a row of incredible gains," said J.J. Kinahan, chief strategist with TD Ameritrade. "The market itself was just amazingly strong."
While December can be notoriously slow as trading thins out around the holidays, the month saw plenty of volatility as investors reckoned with fallout from a wave of omicron infections, the Federal Reserve's pivot toward tackling inflation and the temporary shelving of President Joe Biden's Build Back Better spending plan.
The Federal Reserve is expected to raise interest rates this year to fight inflation, and government programs meant to stimulate the economy during the pandemic will be ending. Those policy changes will cause investors, businesses and consumers to behave differently, and their actions will eventually take some air out of the stock market, according to analysts.
"It's going to be the first time in almost two years that the Fed's incremental decisions might force investors or consumers to become a little more wary," said David Schawel, chief investment officer at Family Management Corp., a wealth management firm in New York.
At year's end, the overarching view on Wall Street was that 2022 will be a bumpier ride, if not quite a roller coaster. In a recent note, analysts at J.P. Morgan said they expected inflation -- currently at 6.8% -- to "normalize" in coming months and that the surge of the omicron variant of the coronavirus was unlikely to lower economic growth.
The markets' prevailing positivity may be confounding in a year of acute economic challenges. Yet 2021 also saw strong corporate profits bolstered by exuberant consumer spending -- even in the face of higher prices and supply chain delays.
"The enthusiasm emanates from the fact that Corporate America, as defined by earnings, is doing really well," said Wayne Wicker, chief investment officer at MissionSquare Retirement. "We've seen record earnings and profit margins on the rebound this year, and that's what drives stock prices."
S&P 500 earnings are projected to be up 45% year-over-year in 2021, according to FactSet, an unusually high rate of growth resulting from strong corporate earnings and an easier comparison to weaker earnings in 2020, when the initial shock of the pandemic hobbled businesses.
While markets hate uncertainty, investors tend to "look through" the kinds of transitory issues that dominate headlines, from surging covid caseloads to labor market conditions, Wicker said, making decisions for a multiyear time horizon. A lack of information fueled panic in the early stages of the pandemic, he said. But in 2021, the combination of vaccines and a growing font of data about covid-19 has taught the market "to look through each wave of the pandemic."
This helps to explain why market jitters over omicron subsided relatively quickly in late November and early December, even as the variant spurred a new wave of business and travel restrictions in the United States and abroad.
Investors have taken further assurance from a recent decision by the Centers for Disease Control and Prevention to shorten quarantine times for asymptomatic people, as well as from the lighter overall policy approach by world leaders trying to protect the economic recovery, according to Ivan Feinseth, chief investment officer of Tigress Financial Partners.
"The underlying narrative is positive," Feinseth said in a commentary Tuesday, "with expectations we will see another year of strong corporate revenue, earnings growth and excess cash flow generation in 2022."
Beyond the marquee figures, companies' bottom lines have been pummeled by an array of threats and uncertainties, according to Liz Ann Sonders, chief investment strategist at Charles Schwab. Ninety-three percent of companies on the S&P 500, and 89% of those listed on the Nasdaq have seen their shares slide 10% or more at some point this year.
For all the talk of Wall Street's resilience since the five-week bear market in 2020 at the beginning the pandemic, the "weakness and churn" below the surface has been "severe," Sonders said. But pockets of weakness have been met, she added, by "offsetting pockets of strength."
"I think most investors would choose that environment rather than the bottom falling out all at once ... and I think that environment is likely to continue," Sonders said. "But it does help to sort of explain what many view as this conundrum of how in the world can the market have done so well with all this stuff we're dealing with."
Louis Navellier, chairman of Navellier & Associates, referred to current conditions as a "washing machine market," with money cycling through different sectors as investors try to dodge the various head winds.
"What's been happening since the recovery is money doesn't leave the market," Navellier said. "We've got millions of new people putting money in the market because they have all this cash. The underlying tone of the market is good, it just needs to grow up."
The enthusiastic environment of 2021 trading has fueled a hefty appetite for risk that has lifted more speculative areas of the market. It was evident in the Reddit-fueled ride that propelled struggling "meme-stocks" like GameStop and AMC to explosive heights. Gamestop's shares are up more than 600% for 2021, and AMC is up more than 1,000%. The headline-grabbing runs stymied traditional investors and ushered in a wave of younger, Internet-driven traders that has continued to reshape the market.
Younger investors are more willing to make higher-risk investments, according to the Schroders Global Investor Study published in December, which surveyed more than 23,000 investors in 33 locations around the globe.
"The results indicate that, while many people feel compelled to take on greater risks to compensate for covid uncertainty and concerns caused by rising inflation, this is even more so the case for younger investors," the study said.
Cryptocurrencies, once dismissed as fringe, have seen explosive growth in popularity, especially among younger investors who have lost faith in the traditional financial system. Bitcoin -- which is now accepted in trade by Starbucks, Whole Foods and Home Depot -- has been priced around $50,000 and is up roughly 65% for the year, according to Coinbase. Ethereum, another popular digital coin, is up more than 400% for the year. Dogecoin, the meme-based digital currency championed by Tesla Chief Executive Officer Elon Musk, is up about 3,500% for the year.
Initial public offerings also are poised to hit a record in 2021, boosted by a flood of Special Purpose Acquisition Companies, which bypass the traditional and lengthy path to a public debut in the name of acquiring or merging with an existing firm. Of the more than 1,000 companies, which began trading on U.S. exchanges this year, 53% were Special Purpose Acquisition Companies, according to FactSet.
Keeping up the record-breaking streaks and rosy sentiments may be more challenging in 2022, as the pandemic drags on and monetary policy becomes less supportive, Navellier said.
"We're about to enter into a funnel," Navellier said. "We were comparing to pandemic and now we're comparing to a pretty good recovery. It's a very good environment, but the year-over-year is going to get tougher."
Trading was very slow Friday, with most of Wall Street on vacation and many fund managers already closed out of their positions for 2021.
The major indexes spent much of the day flipping between small gains and losses. The S&P 500 fell 12.55 points, or 0.3%, to 4,766.18. The Dow slid 59.78 points, or 0.2%, to 36,338.30. The Nasdaq fell 96.59 points, or 0.6%, to 15,644.97.
The Russell 2000 index of smaller companies slipped 3.48 points, or 0.2%, to 2,245.31. The index ended the year with a gain of 13.7%.
The yield on the 10-year Treasury note held steady at 1.51%.
Information for this article was contributed by Taylor Telford and Rachel Siegel of The Washington Post; by Alex Veiga of The Associated Press; and by Coral Murphy Marcos and Emily Flitter of The New York Times.