The Dow and S&P 500 closed out the week in green…a festive Santa Claus rally. And this is the third straight year of gains for the Dow, S&P and Nasdaq, which are each not far from record highs. In fact, the S&P 500 closed at an all-time high 70 times this year.
Optimism about the effectiveness of vaccines helped fuel investor enthusiasm though, as did the steady hand of the Federal Reserve and other central banks, which have mostly pledged to tread cautiously as they look to normalize monetary policy and slowly begin raising interest rates.
The US economy wobbled a bit in the third quarter, with growth slowing to an annualized pace of just 2.3%. Still, consumer spending remains relatively strong and the red hot housing market has continued to be a bright spot for the economy.
But investors will be watching the Fed closely in 2022.
Traders are currently pricing in a more than 50% chance that the Fed will raise rates for the first time since 2018 at its March meeting and that Jerome Powell & Co. will wind up hiking rates a total of three times next year in order to fight inflation.
Investors will be watching Washington as well to see whether or not more stimulus might be coming from the White House and Congress after President Biden’s plan to pass a Build Back Better Act has hit a snag.
The market will also be keeping an eye on Covid cases to see if more businesses will delay return to work plans or be forced to impose tougher restrictions such as mask and vaccine mandates.
The winners and losers
Home Depot (HD) and Microsoft (MSFT) led the Dow this year, with each blue chip stock surging more than 50% in 2021. Oil companies Devon Energy (DVN) and Marathon (MRO) were the best performers in the S&P 500, rallying thanks to surging crude prices. Both stocks more than doubled.
Leisure stocks were big losers though. Disney (DIS) was the biggest dog of the Dow, falling nearly 15% this year. The company was hurt by increased competition from Netflix (NFLX) and others in streaming media.
A slowdown in tourism, particularly in Asia’s Macau gaming mecca, and a fierce battle for customers in the nascent legal US sports betting market hurt casinos.