As 2021 ends (to borrow from a Talking Heads lyric), “You may ask yourself, well— how did I get here?” The year was tumultuous and anxiety-inducing in many ways, but both the S&P 500 and the S&P Small-Cap 600 look to close out 2021 with gains in excess of 23%.
If you’re worried about an overextended market, consider this. If the S&P 500 closes the year with a 25% gain or better, the three-year return of the broader market will be greater than 70%. The last time the market delivered a three-year return that was at or above that level was 1997-1999 when the index returned 77.21%. Leading up to that period, the market earned 85.38% from 1996-1998 and 77.94% in 1995-1997. After that, you have to go back to the 1950s to find a three-year period with greater gains than we have just experienced in the market.
A little natural regression to the market’s mean returns from this point might be welcome relief. Still, much of the market mechanisms that support equities remain in place at the start of 2022, especially in the large-cap segment. Economic headwinds of the last two years will continue to keep some industries and companies grounded, while other businesses will be able to maintain a steady altitude above the storms.
Reprinted from the January 2022 issue of the SmallCap Informer.
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