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Q4 2021 Market Commentary: Endless Cycles

After getting through a tumultuous 2020 defined by the COVID pandemic, we started 2021 hopeful we might be getting close to a return to some sense of normal. There were several promising vaccines rolling out and the biggest challenge for many was securing an appointment to get the shot. Gradually the number of people vaccinated began to climb and the COVID case count began to plummet. Once again, we started to gather in large crowds at sporting events and concerts. 

Then the Delta variant took over, and case counts, hospitalizations, and deaths from COVID began to rise again. While the vaccine appeared to protect against the worst cases of COVID, it wasn’t enough to prevent infection. Vaccine mandates and/or mandatory masks became common, and booster shots were rolled out in the fall. As we entered the end of the year, the Omicron variant took over with what appears to be a much more contagious yet milder version of COVID. Many of us were finally able to gather with friends and family over the holidays, which only appears to have increased the speed of the Omicron spread. 

The last two years have felt like an endless cycle of hope and despair. We have lost friends and family to the virus and seen others spend weeks in the hospital, wondering if they’ll ever come home. We have also been reunited with friends and family after months apart and felt the joy of physical connection again. This rollercoaster ride of emotion is not new to us, but COVID has certainly pushed our emotions to the extremes. 

These emotions can drive us to act in ways that might not seem completely rational to others. We have all had different reactions to this pandemic and those reactions have changed as we’ve gone through the various waves of infections. We see the same type of emotion-driven reaction in the investment markets as they go through cycles like we’ve seen from COVID, and investors react in similarly irrational ways.

The best way to approach these cycles is to try to avoid extreme reactions and take a balanced and patient approach. You don’t want to reduce your stock exposure after the market has crashed, and you don’t want to rush into stocks after the market has gone up. This is why we believe in establishing a target allocation among various asset classes and rebalancing your portfolio periodically to stay aligned with those targets. This approach helps take the emotions out of your investment decision-making and increases your odds of success over the long-term. 

2021 Market Performance

In 2021, most asset classes continued their strong run of performance since the COVID selloff in March 2020. The S&P 500 finished the year up 29% with very little volatility. The average intra-year decline in the S&P 500 over the last 40 years is 14%, but last year the biggest decline was just 5%. That compares to a decline of 34% in March 2020.

After posting the worst returns of any asset class in 2020, REITs and Commodities bounced back with some of the best returns of 2021, as REITs were up 41% and Commodities were up 27%. On the flip side, emerging market equities went from a top performer in 2020 to the bottom in 2021, posting a return of -2.2%. International developed market equities fared better, posting a return of 8.3%.

With the Federal Reserve indicating they’ll raise rates multiple times in 2022, bonds markets took a hit in 2021. The Bloomberg US Aggregate index fell about 1.5% on the year, but some areas of the bond markets still posted positive returns. Treasury Inflation Protected Securities (TIPS) were up about 6% as inflation spiked towards the end of the year, and high yield bonds were up about 1% overall.

US vs International Stocks

While the overall market performed well in 2021, when we dig a little deeper, we see some areas of divergence in the underlying asset classes. For years now we have seen US stocks outperform international stocks, and this continued in 2021. This chart from JP Morgan highlights the extended run of outperformance in US equities compared to international equities over the past 14 years. However, it’s important to look beyond just the past 14 years as international stocks outperformed US stocks for 7 years prior to this. You can see from the chart that we have been through many cycles of US and International outperformance over the past 50 years, which is why we continue to believe it’s important to maintain an international allocation in spite of recent poor relative performance.

Value vs Growth Stocks

Just as US stocks have outperformed international stocks in recent years, Growth stocks have outperformed Value stocks. Below is a chart from Ben Carlson that is similar to the international vs US chart above, with this one showing the cycles of outperformance of returns in growth and value stocks. Past performance is never an indicator of future returns, but we have a lot of evidence pointing to this being a cyclical pattern.

Many experts will claim growth stocks deserve their outperformance as technology companies are driving innovation and pushing our economy forward. This might be true, but even on a relative basis, growth stocks are historically expensive. JP Morgan put together the next chart that looks at the forward price-earnings ratio of value stocks vs growth stocks. While growth stocks have historically had a higher forward P/E ratio, relative to value stocks they are currently much more expensive than they have been in the past. There have been some signs in recent months that this outperformance in growth stocks could be coming to an end, but it remains to be seen whether that will continue into 2022.

Rising Rates and Inflation

One of the biggest concerns of many investors right now is the current low interest rate environment combined with the recent high inflation readings and the prospect of rising rates this year. An increase in rates will negatively impact the value of your bond portfolio, however the magnitude of that loss is minimal compared to the drawdowns we often see in the stock market. The chart below from JP Morgan illustrates the impact of a 1% rise in interest rates on various US Treasury maturities. The blue line represents the total return, which includes interest income, while the grey line only shows the price return. 

While nobody likes to own an asset that might lose value, bonds are still an important diversifier for your portfolio. When stocks go through another drawdown, it’s very likely bonds will provide the protection you need to get through that downturn. A continuous rise in interest rates is also not guaranteed as any bumps in the road in the economic recovery could lead the Federal Reserve to back off their planned rate hikes. 


The last two years have been difficult, but we again enter the new year with hope. We know COVID isn’t going away completely anytime soon, but we are learning how to respond to the inevitable cycles. We will learn to avoid the extremes, just as we do in our investment portfolios. In this last chart from JP Morgan, we see how the “average investor” has performed over the past 20 years compared to various asset classes and a balanced portfolio. This average investor chases performance when stocks are doing well and sells at the bottom. Our goal is to help you beat the average investor and to avoid the extreme reactions that lead them to make investment mistakes. If you have any questions about your portfolio, please reach out to us.

-Chris Benson, CPA, PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change.  These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Please see Additional Disclosures more information.