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Capital Market 2021 Year-End Update

With 2021 coming to a close, investors should be aware of how the capital markets are performing up to this point. Since the S&P 500 dropped 34% in March 2020, the stock market has significantly recovered and surged, gaining 109% as of November 12th, 2021. 

What’s causing the stock market surge?

Since the pandemic, the stock market has had a boost from fiscal spending policies and strong consumer spending, as well as a high inflation rate. 

All of these things considered, the stock market is still relatively expensive overall when we look at the forward price-to-earnings ratio from a historical perspective. However, it is not as expensive as we saw with the early aughts tech bubble. When we look at the valuations for just this year alone, the stock market P/E ratio has actually gone down, from 22-23x earnings in January to 20-21x earnings currently.

S&P 500 Index: Forward P/E Ratio

Most of the stock market valuation improvement was driven by strong corporate earnings for the year, steadily growing throughout and beating analysts’ predictions. 

S&P 500 Year-Over-Year Operating EPS Growth

What should investors expect in 2022? 

In the coming year, we can expect fewer stimulus policies and we know that the Fed will be easing their bond purchases. Later in the year, we will likely see the raising of interest rates as well which will also affect valuations.

We also don’t anticipate earnings growth to be as robust in 2022 as it was this year - the reason for this is because 2021’s earnings were largely due to a “grand reopening” of the economy, which isn’t something we’ll likely repeat. That’s not to say that earnings won’t perform well; the growth, however, will be more level.

And while politics doesn’t usually factor into the performance of the stock market, investors should be aware that the consideration of the Build Back Better program, the passing of the infrastructure bill, and other government monetary injections may affect the economy - which in turn will affect stock market performance.

If investors are looking to beat rising inflation, they should still look into stocks or real estate to help offset inflation in the long-term. From a long-term perspective, the S&P 500 Index averaged a 14.3% annual return and was up 31 out of the last 41 years. Investors should also consider their comfort with risk, their time horizons, and how diversified they want their investments to be, all factors that need to be taken into consideration for each investor. 

S&P 500 Intra-Year Declines vs. Calendar Year Returns

Have questions about capital market performance?

If you have any questions or concerns about how capital markets are performing at year-end or what to expect in 2022, we invite you to contact us today so we can discuss your portfolio, your risk tolerance, and your time horizons in order to make the best possible financial decisions for your situation. 


The Team at Chatterton & Associates

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

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