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Thursday, November 30, 2023

30% gains, 70 record high closes, no corrections

You read that right. The stock market of 2021 – using the S&P 500 as a proxy, we can quibble about that later – was one of the best of all time according to Ben’s research

The S&P 500 was up 28.7% including dividends. There have been 17 times since 1928 the market was up 30% or more so it’s not the best performance but considering it was up 12% in 2016, 22% in 2017, down 4% in 2018, up 31% in 2019 and up 18% in 2020, that’s not bad at all.

U.S. stocks are on a heckuva run of late.

In 2021 there were 70 new all-time highs. This number is shockingly high this far into a bull market. Put a pin in this one for a minute. We’ll come back to it.

The worst peak-to-trough drawdown in 2021 was just 5.2%. That puts it in the bottom 10% of all calendar year drawdowns over the past 94 years of data. The worst down day was a loss of just 2.6%.

The degree to which the bears and “macro guys” have been wrong over this period had already been shocking going into last January. To see 2021 play out this way is just the cherry on top. None of the shit they’ve been talking about has actually mattered – policy errors by the Fed, CAPE ratios, the popularity of indexing, the concentration of market cap in the FANGs, “peak” profit margins (which have been peaking for a decade now, maybe you should pick a different adjective), venture capital bubbles, buyback bubbles, blah blah blah. It’s just content. Completely misleading (borderline destructive) to the readers. A huge waste of time, energy and attention.

The Fed will eventually make a mistake that doesn’t get fixed easily. Okay, of course. Perhaps they’ve already made one by continuing to buy financial assets a full year after they no longer needed to. That will not be good for stocks, investor confidence, etc. A geopolitical event will certainly pop up sometime soon that shakes everyone out of their complacency. Sure, I’ll stipulate that too. Russia invades Ukraine or China surrounds Taiwan with its navy. Maybe even both at the same time.

And then what? It’ll be tough. Stocks will fall. There will be volatility.

And then what after that? Everyone buys back whatever they sold and life goes on. How many episodes do you need to have seen?

In 2021, the US economy experienced some of the worst inflation of all time. Just brutal. The S&P 500 responded by gaining a third of its value amid virtually zero volatility at the index level. There was plenty of volatility under the surface in individual stocks, but none of it actually related to inflation. Last year’s volatility stemmed from excess enthusiasm and subsequent heartbreak from the IPO and growth stock craze – not higher prices in the real economy, as those were passed along to consumers who were able to afford it because of higher wages and savings. Stocks worked because companies could take price and live through it.

It would have been very difficult to have foreseen this outcome in stocks, especially had I given you the inflation data in advance.

And yet, here we are. Unexpected things happen all the time. This past year is merely the latest lesson in a long series of them.


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