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Reflections on the 2021 stock market

Anthony Saglimbene, Global Market Strategist – Ameriprise Financial
As of Dec. 13, 2021

By the end of first quarter 2021, the rotation to cyclical value stocks intensified, major U.S. averages finished their fourth straight quarter higher and the 10-year U.S. Treasury yield surged 82 basis points to 1.74%. Momentum was driven by: 

  • The $1.9 trillion U.S. stimulus bill passed in March 
  • Increased retail buying 
  • A SPAC boom 
  • Strong equity flows 
  • Fear-of-missing-out trading behavior in cryptocurrencies and meme stocks

Continuing through much of the first half of the year, economic trends in the U.S. accelerated as COVID-19 vaccinations increased, pandemic restrictions faded and more of the world returned toward pre-pandemic activities. However, the global economic rebound remained uneven because of ongoing virus challenges, supply bottlenecks and labor shortages. 

Shortly before the beginning of the second half, cyclical/value areas of the market saw their luster fade. At the time, growing fears that the Federal Reserve would let inflation run too hot and tighten policy more rapidly helped drive investors back to growth stocks late in the quarter. Cyclical areas lost additional momentum in the third quarter as economic and reopening trends slowed.

The S&P 500® Index posted a slight gain in Q3 — its sixth straight quarter with a positive return. However, three other major U.S. stock indexes ended the quarter lower. Unlike in previous quarters, and since the depths of the pandemic last year, the path of least resistance for stock prices was lower during most of Q3 — particularly in September.

Stocks also faced headwinds from an uptick in COVID-19 cases and related pandemic concerns. In addition, supply chain disruptions, transportation bottlenecks, inflation pressures, increased regulations out of China and concerns over the Federal Reserve reducing its bond purchases were other factors that weighed on investor sentiment.

Dynamics in Washington also sapped buying enthusiasm in Q3, as the path forward for fiscal stimulus became more complicated as the quarter progressed. Budget and spending debates and deep Congressional divisions on how to raise the debt ceiling contributed to the S&P 500 posting its worst September performance since 2011. An uptick in interest rates at the end of the quarter also pressured Technology.

At the close of the year, a new COVID-19 variant (Omicron), the potential for tighter central banker policies in 2022 and a slowing growth environment have given investors pause after a roughly +110% gain in the S&P 500 from the pandemic lows in March 2020. 

In our view, it’s natural for markets and investors to take a pause given a still uncertain pandemic environment. However, there is room for asset prices to modestly rise next year, particularly as more of the world emerges from the pandemic. Year-to-date gains across major global stock averages, including the United States, are looking to close the year with strong gains. In several areas, stock returns are well above annual historical averages experienced in a calendar year. 

As you reflect on the year and review your portfolio with your financial advisor, we believe four big-picture themes are important. Combined, these could help support stock prices next year.

  • A robust economic environment should remain a tailwind for job growth next year. In our view, the labor market should continue to strengthen in 2022, particularly in areas depressed by the pandemic. More workers could slowly return to work as pandemic pressures fade, the savings rate comes down, higher wages entice people off the sidelines and activities continue to return to normal. This could be a positive for growth, spending and corporate profits next year.
  • Corporate America has materially outperformed profit expectations in the first three quarters of 2021. Given investors had worried supply chain and inflation pressures would cause more companies to miss expectations, the much stronger-than-expected profit picture justifiably fueled higher stock prices in October and early November, in our view. On a historical basis, valuations remain elevated. However, given the outsized economic growth we are likely to see into next year, combined with low interest rates, easy monetary conditions and strong profit trends, the valuation appears reasonable, in our view. Companies that continue to do a solid job holding profit margins could continue to be rewarded by higher stock prices.
  • Equities continue to provide opportunities for portfolio growth. In our view, tilting portfolios toward stocks and underweighting bonds this year was the single most important tactical decision investors could have made. Given strong earnings trends and elevated valuations, investors should anticipate a positive but more moderate pace of price appreciation next year. Corporate earnings could also continue to be impacted by constraints across the supply chain (ports, trucking, storage) and the availability of semiconductor chips. 
  • A strong economy should support the gradual reduction in Federal Reserve support. The Fed’s decision to reduce asset purchases and potentially begin raising interest rates slowly next year is because the economy can likely support more normal policies. But through much of 2022, interest rates are likely to remain low based on historical norms. Stocks tend to perform well as the Fed begins to raise interest rates, as long as the pace of rate increases are gradual. Thus, in our view, monetary policy is likely to support higher asset prices (including stocks) through at least the first half of 2022. 

Given the still-strong macro backdrop, earnings growth and the potential for above-trend economic activity, we believe stocks could continue to perform well in 2022. If you have questions about your personalized investment portfolio, we encourage scheduling a review with your Ameriprise financial advisor. 


Data source for indices and sector graphs: Morningstar Direct, as of Dec. 13, 2021.

These examples are shown for illustrative purposes only and are not guaranteed. Past performance is not a guarantee of future results.

Unless otherwise noted, all data is sourced from FactSet and Bloomberg as of Nov. 30, 2021. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

The views expressed in this material are as of the date published and are subject to change without notice at any time based upon market and other factors. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such. This information may contain certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable.

This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns.

Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.

Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.

A fund may invest significantly in issuers within a sector that may be negatively affected by market, economic or other conditions, making the fund more vulnerable to unfavorable developments in the sector.

A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. 

Past performance is not a guarantee of future results.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Definitions of individual indices and sectors mentioned in this article are available on our website at in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.

Third-party companies mentioned are not affiliated with Ameriprise Financial, Inc.

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