2021 in Review

by Justin Lowry, President & CIO, Global Beta Advisors, LLC

As we wind down the last trading days of 2021, we are on the verge of another banner year for the S&P 500 Index. The S&P 500 Index is currently up 23.18% with an annualized standard deviation of just 10.75% (source: FactSet Research Systems, as of 11/30/21). In fact, the S&P 500 Index is set to close 2021 better than 2020, and if current levels hold, it will be the 9th best year for the index since 1990 and the 6th best year on a risk adjusted basis over that span (source: FactSet Research Systems, as of 11/30/21).

2021 Investment Review

You’ll notice that 4 out of the top 10 calendar year returns for the S&P 500 came during the peak of the tech bubble, which is a period that we have seen as a constant point of comparison by investors to 2020-2021. However, investors tend to see returns achieved during the tech bubble as synonymous with higher levels of volatility.


S&P 500 Top 10 Returns

S&P Top 10 Returns

(Source: FactSet Research Systems, 12/31/89 to 11/30/21. YTD refers to the returns from 12/31/20 through 11/30/21)



S&P 500 Top 10 Risk Adjusted Returns

S&P 500 Top 10 Risk Adjusted Returns

(Source: FactSet Research Systems, 12/31/89 to 11/30/21. YTD refers to the returns from 12/31/20 through 11/30/21)


As you can see, 1996 and 1998 falls out of the top 10 on a risk adjusted basis, however, as mentioned, 2021 jumps to 6th on a risk adjusted basis. Most of the smooth ride experienced this year can be explained by substantial accommodative monetary policy afforded by the Federal Reserve in response to the pandemic. However, once the Federal Reserve takes away the punch bowl, the smooth ride may be over. Why is monetary policy so significant for this current market? Because most of the leaders in the S&P 500 have been from higher growth names that have consequently attained lofty multiples.

Of course, there is cross-pollination between factors, but generally speaking, growth stocks have once again led the S&P 500 to newer highs as it did in 2020. Typically, when the Federal Reserve lowers the Federal Funds Rate and purchases bonds in the market to create more liquidity, it tends to push investors into riskier asset classes to find yield as bonds yields become suppressed. It also enables investors to take on more financial leverage with borrowing costs lower, which we believe is a catalyst for higher asset prices.


Where are the S&P 500 Returns Coming From?

Where are the S&P 500 Returns Coming From?

(Source: FactSet Research Systems, a 11/30/21)



S&P 500 Growth Index – Price to Sales

S&P 500 Growth Index - Price to Sales

(Source: FactSet Research Systems, price-to-sales ratio from 12/31/96 through 11/30/21)


However, with this leadership comes the consequence of stretched valuations. The S&P 500 Growth Index is currently sitting at a price-to-sales ratio similar to that of the tech bubble.

The above chart illustrates the monthly price-to-sales ratios for the S&P 500 Growth Index over the past 25 years. As you can see, the S&P 500 Growth Index is hovering around its highest price-to-sales multiple observed in nearly 2.5 decades. Our research has shown that, when an index is on the higher end of its historical price-to-sales multiple, its returns over the next decade tend to be below average. This coincides with the risk of hawkish monetary policy and its potential impact on names that have experienced stretched valuations. For these reasons, Global Beta believes the medium to long term outlook for growth stocks is quite negative, particularly relative to the rest of the equity markets and other asset classes.

Although we believe the long-term prospects for most growth stocks are negative, the short-term prospects for equity markets seem to be favorable from a nominal standpoint. Below we examine the calendar year returns following the ten best years in the S&P 500 over the past 30 years:


S&P 500 Top 10 Returns – The Following Year

S&P 500 Top 10 Returns - The Following Year

(source: FactSet Research Systems, 12/31/89 to 11/30/21. YTD refers to the returns from 12/31/20 through 11/30/21)



S&P 500 Top 10 Risk Adjusted Returns – The Following Year

S&P 500 Top 10 Risk Adjusted Returns - The Following Year

(source: FactSet Research Systems, 12/31/89 to 11/30/21. YTD refers to the returns from 12/31/20 through 11/30/21)


Notably, the years that followed the tech bubble years performed exceptionally well, while the remaining years generally attained average to above average returns relative to the S&P 500’s average of 11.99% (data per FactSet Research Systems, 12/31/89 to 11/30/21). The general take-away from this graph is that big performance years by the S&P 500 seem to be followed with solid returns the following year, even in the face of stretch valuations. Again, none of the above periods experienced the magnitude of inflation that is threatening our economy currently (CPI data per FactSet Research Systems, 12/31/89 to 11/30/21), which could put 2022 in jeopardy of bucking this historical trend. This is why we began our discussion highlighting that this year’s performance was achieved with relatively low volatility because liquidity and real returns may be an issue next year.

From a risk adjusted standpoint, the results are a bit mixed with the tech bubble years again showing some resiliency the following year. 2017 stands out as the lone year with a negative risk adjusted return in its following year. However, we fear that 2022 could look similar to 2018 as that was the first year the Federal Reserve began raising the Federal Funds Rate following the 2008 financial crisis. That said, the Federal Reserve was not in a position then to respond to the levels of inflation that we are currently witnessing.

As you can see, the circumstances are indeed a bit different this time around, which has us believe that the market may be more receptive to rate hikes as the risk of an overheating economy seems to outweigh the risk of rising rates. Our takeaway is that the trajectory of inflation, and the resulting response from the Federal Reserve, will dictate the outlook for the market in 2022 as we believe that stocks with stretched valuations and low profitability will be faced with significant risk of decline.


U.S. Monthly CPI Year-Over-Year Change (%)

U.S. Monthly CPI Year-Over-Year Change (%)

(source: FactSet Research Systems, 12/31/89 to 11/30/21. YTD refers to the returns from 12/31/20 through 11/30/21)


As investors navigate the risk of persistent levels of inflation, some may believe that crypto currency could provide as a reasonable alternative in the face of inflation. However, because the track record for crypto currency is limited (seemingly non-existent during periods of inflation), we believe it’s impossible to make a definitive determination as to whether crypto currency can provide return growth during inflationary periods. Therefore, we believe it is best to follow asset classes with longer track records in order to optimally manage around inflationary risks, such as gold or oil, or any asset class with a correlation to a commodity. Overall, it is our belief that investors ought to be managing valuation risk within their portfolio as we head into 2022.

The S&P 500 is an index of 500 leading companies and covers approximately 80% of available market capitalization.

Standard Deviation is a metric that measures the dispersion of returns from the mean of the dataset.

Price-to-Sales is a measurement of a company’s market capitalization divided by its 12-month trailing sales.

Risk-Adjusted Returns is a measurement that takes the return of an asset, subtracts it by the risk free rate (typically, the U.S. 3-month treasury bill), and divides that my the asset’s standard deviation of return over that period.

Tech Bubble denotes the emergence of internet related companies between 1995 and 2001.

Consumer Price Index (“CPI”) is an index published from the U.S. Bureau of Labor, which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance, please call (833) 933-2083.

Investing involves risk and the possible loss of principal.

The views expressed are those of the portfolio managers as of 12/27/21, are subject to change and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice.

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