Despite most expectations, stocks continued their death-defying run last year and the S&P 500 finished the year with its second best three-year winning streak in history, bested only by the late 1990s tech bubble. In the face of the highest inflation in 40 years, an acceptance of the Federal Reserve raising interest rates, and another year of coronavirus restrictions, the S&P 500 soared 28.7%. The stocks of lower quality value companies, particularly oil firms and banks, led this surge. Given that we avoid companies with poor long-term outlooks, your account underperformed this past year — although results over the past several years have been strong.
What is likely to occur in 2022? It is certainly not lost on us that the last time the markets had such a strong three-year return during the 1990s technology bubble, it went on to plummet 54% from 2001 to 2003. Is it time for this bull market to die? Stocks have dropped 10% in the first month of the year, and investors are justifiably growing nervous. The Citigroup Economic Surprise Index (see below) has recently turned negative, indicating that most economic reports are starting to disappoint. Investors are fearing a reprise of 2018 when the economy started to weaken and the Federal Reserve began to raise interest rates, sending stocks into a downward spiral.