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State of the Markets Report: How Did Stocks Perform in 2021?

State of the Markets Report: How Did Stocks Perform in 2021?

January 20, 2022

Over the next few posts, we'll take a look at the State of the Markets. In this 3-part series, we'll focus on three key areas: how stocks performed in 2021 and what drove performance, where we are now, and what financial experts forecast for 2022.

Let’s begin by looking back at Wall Street analysts' initial predictions for the market’s performance in 2021, how stocks actually performed in 2021, and some of the factors that drove that performance.

How Did Stocks Perform in 2021?

Sources:, December 17, 2020 (, December 31, 2021 (

With multiple COVID-19 vaccines announced in the latter part of 2020, Wall Street analysts were cautiously optimistic about 2021. While the U.S. wasn’t out of the woods at that time, there were a number of reasons to be hopeful for a strong economic recovery, including multiple vaccines to stem the spread of infections, fiscal support, monetary accommodation, and a budding reopening.

As you can see from the actual results, the market performed better than even the most bullish analysts could have hoped. For instance, JPMorgan was the most optimistic of analysts on this list, calling for about a 20% increase from 2020 closing levels. Even that prediction ended up underestimating where the market closed out 2021.

Let’s talk about some of the factors that led to this.

What Drove Market Performance in 2021?

After a bumpy start to the year due to a slow vaccine rollout and political uncertainty, the stock market climbed steadily higher throughout the year with a succession of better-than-expected quarterly corporate profit results and a strong rebound in economic activity.

However, the climb was not without its hiccups, as the rise in Delta variant infections in the third quarter, accelerating inflation, and worries over the Fed’s tapering plans led to short-lived pullbacks.

In the following images, we’ll discuss each factor separately and in more detail. First, though, let’s look at how these factors affected stocks over the course of the year.

What Happened in 2021?

As the chart shows, you see a steady move higher throughout 2021, except for some periodic dips, the worst of which was a retreat in September as concerns about the economy and Fed policy peaked.

The S&P 500 is an unmanaged index that is generally considered representative of the U.S. stock market. Keep in mind that past performance does not guarantee future results. Individuals cannot invest directly in an index. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

Without going through each of these dates, let’s look at a few noteworthy points.

As you can see, the market was choppy during the first quarter of 2021. But take a look at mid-March, where the U.S. crossed the mark of 100 million vaccinated Americans. At this point, the sense was beginning to grow that the nation had overcome the fits and starts in our vaccination rollout. Investors began to feel more comfortable that the country was finally getting to a place where the economy could sustain its growth momentum.

There were scares throughout 2021. Look at the middle of July and, more broadly, the month of September. The one-day slide in July and the nearly one-month retreat in September were largely attributable to COVID-19-related events.

We saw the stock market resume its climb in October, based on the strength of strong corporate earnings, a decline in COVID cases, and an upbeat report from the Fed.

Markets turned volatile into the close of the year, slumping on news of the Omicron variant the day after Thanksgiving and testimony by Fed Chair Powell that he was considering accelerating the bond taper and contemplating more rate hikes sooner than anticipated. Higher inflation and an improving labor market were cited as reasons to justify accelerating monetary normalization.

The market closed out the year with the Fed announcing some decisive steps on monetary policy that may very likely impact the markets into 2022, which we’ll discuss in more detail later in the presentation. Despite the pivot toward a less accommodative monetary policy, stocks climbed higher into year-end as Omicron fears receded a bit.

Corporate Earnings

Source:, November 8, 2021:

Corporate earnings are one of the primary determinants of stock prices over the long term. As the chart indicates, corporate profits came roaring back from their 2020 pandemic levels, lifting investor sentiment.

Earnings soared in the second quarter of 2021, posting a 25% year-over-year jump in corporate profits. However, the third-quarter results may have been even more impressive since the 17% growth in earnings was during a wave of new Delta variant infections. Investors were especially impressed that the spike in infection cases did not diminish consumer demand and that companies were able to maintain their profit margins amid rising inflation and supply chain challenges.

The Economy

The economy staged a strong rebound in the first half of the year, as evidenced by the successive increases in GDP. However, growth moderated in the third quarter due to a rise in COVID infections and growing bottlenecks in the supply chain. While many observers anticipate a reacceleration of GDP expansion in the fourth quarter, continuing supply chain problems may prove to be a drag.

Labor markets were slow to benefit from the economic reopening of the first half, but as you can see, the unemployment rate dropped sharply by the end of the third quarter. As we entered into the last three months of the year, the labor outlook continued to improve, with job openings exceeding the number of unemployed and robust wage growth.

Inflation developed as a real concern as the year progressed, rising from a modest 2.6% in March to 5.4% in September, with October and November 12-month inflation rates setting an even higher bar. We’ll examine this development a bit more in-depth a bit later.

Consumer sentiment was on an upward trajectory, as American consumers felt better about the economic reopening and safer with the rollout of an effective vaccine. However, it flagged amid a surge in Delta variant infections at the start of the second half of the year. The fourth-quarter number is the actual sentiment reading for November and reflects a continued downward slope in consumer outlook due to rising inflation and the perception that policies have not been put in place to arrest the rise in prices.

Finally, home builders' optimism was especially high in 2021, not surprising given the low-interest-rate environment and the continued consumer demand for homes amid the pandemic. The number indicated is a survey of single-family home builders, their view of current conditions, and their six-month outlook. Scoring on the basis of 0 to 100, you can see how high their optimism was throughout the year, notwithstanding a dip in the third quarter, owing to that quarter’s resurgence of COVID cases.

What's Next?

These were a few of the factors that affected market performance in 2021. In our next State of the Markets Report post, we'll cover where we are now and examine the headwinds and tailwinds that could affect the direction of economic growth and financial markets in 2022. If you have any questions about the market, please contact one of our financial advisors today.

Sources for What Happened in 2021:, December 31, 2021:, January 20, 2021:, March 11, 2021:, March 19, 2021:, April 1, 2021:, April 2, 2021:, April 29, 2021:, May 12, 2021:, May 13, 2021:, September 13, 2021:, November 3, 2021:, November 3, 2021:, November 5, 2021:, November, 10, 2021:, November 12, 2021:

Sources for The Economy, November 12, 2021:, November 12, 2021:, November 12, 2021:

University of Michigan, November 12, 2021:

National Association of Home Builders, December 14, 2021:

Atlanta Federal Reserve Bank, November 10, 2021:

Federal Reserve, September 22, 2021: