The thing about investing is that it’s a lot easier to look back than forward. I will take the easy way out and talk about what was interesting in 2021.
The website Investopedia has more than 20 million monthly readers. As you likely concluded by the website’s name, it draws a more investment-centric crowd than Google. Investopedia identified the most popular investment terms of 2021. I’ll list them and give my thoughts on why they were so popular. Were any of these compelling to you last year?
- Capital gains tax: Last year, investors were trying to determine if they should sell assets and pay taxes on gains in 2021. They were concerned that the White House would raise taxes in 2022. The income brackets for 2022 capital gains rates are broader than in 2021. However, the proposed 2021 legislation to increase the capital gains rates on wealthy Americans did not become law.
- Fiat money: The U.S. dollar is an example of fiat money. Fiat money is a government-issued currency not backed by a physical commodity, such as gold, but rather by the government that issued it. I hypothesize that many people looked up “fiat money” because cryptocurrency investors contend that crypto is safer than fiat money. That assertion is a load of baloney. Cryptocurrencies are more “fiat” than fiat money. The U.S. government, for example, is supported by the rule of law, a functioning democracy, infrastructure, an educational system, corporate profits, ownership rights, etc. The value of a crypto coin is based solely on what the next person will pay for it.
- Inflation: This one is obvious — everything is more expensive than a year ago, and we want to know why. Spoiler alert: the reason is too much money chasing too few goods.
- HODL is a term derived from the misspelling of “hold.” It refers to the “diamond hand” strategies of cryptocurrency investors who are willing to hodl, er, hold their investments through the wildest of volatility. Credit where credit is due; I don’t think I could handle seemingly constant 50-percent crashes. This new age of investors has guts that I wish I had. Fun fact: “HODL” originated in 2013 with a post to an online Bitcoin forum when a drunk user explained that Bitcoin traders would be better off “hodling” their coin.
- Child tax credit: As part of the American Rescue Plan Act, enhanced child tax credit checks were mailed out through December 2021. As the Build Back Better plan stalls, so do plans to add more money to the monthly child tax credits.
- ESG (Environmental, social, and governance) screening standards became more popular for socially conscious investors. I predict that this term will be popular in 2022 as the Securities and Exchange Commission (SEC) clamps down on investment management firms claiming to be ESG-focused but who have no screening to validate their claims.
- Dogecoin: The frequency of the searches likely increased due to Tesla CEO Elon Musk tweeting about it. Dogecoin is a “joke” cryptocurrency that somehow attracts investment dollars. It’s a “joke” with a $30 billion market capitalization; I’m not sure if the joke is on us or if it’s the sign of a bubble. Maybe both?
- NFT: Copy-and-paste alert: Non-fungible tokens are cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other. Although I needed to copy-and-paste from Investopedia to do justice for the definition, I actually understand the value in NFTs, as opposed to various cryptocurrencies. Well, maybe “understand’ is a bit generous. I understand the value of NFTs as much as I know the value of traditional art. But then again, I’ve seen multi-million dollar exhibitions at the New York Museum of Modern Art that I thought were misplaced piles of trash. So, the concept, I understand – the value, maybe a little less.
- Short interest is the number of shares that investors have sold short. In other words, it’s the amount investors are betting that a stock price will drop. The searches for short interest likely spiked because the followers of the Reddit page “Wall Street Bets” often searched for companies with heavy short interests. Reddit’ers then piled into those stocks to squeeze the short holders, defying Wall Street big wigs in the name of the little guy. This gave rise to 2021 meme-stocks like Game Stop, AMC Entertainment, and BlackBerry.
- Conservatorship: The #FreeBritney movement sparked the search for “conservatorship.” Popstar Britney Spears’ father was granted conservatorship of his daughter and her estate in 2008. In February 2021, the New York Times released a television documentary titled Framing Britney Spears, which brought mainstream attention to the conservatorship case.
I am surprised that no term related to the Great Resignation made the list. In 2020, 36.3 million people quit their job and 38.6 million left from January 2021 to October 2021 (the most recent year-to-date data). That seemed worthy of more inquiry.
The financial outlook of 2021
In last week’s column, I painted a picture of what 2022 could look like for the economy and the markets. Let’s add some detail. Last week, I asserted that the stock market had about a two-in-three chance of being up in 2022 but that the gains would likely be slim. I want to revise that prognostication a bit — I think the first 10 months of 2022 will be flat-to-negative for the stock market.
2022 is a mid-term election year, and the stock market does exhibit some unique characteristics in those years. The stock market typically meanders through October during mid-term years, dipping slightly to the negative at times. If investors can get through those first 10 months, there is a silver lining. Since 1950, the average 1-year return following a mid-term election exceeds 15 percent, roughly double the average of all other years.
Throughout the past five decades, the President’s party has lost about 30 seats in the House of Representatives and four seats in the Senate in mid-term elections. The President’s approval rating usually sinks after they take office, motivating the party not in power to get out and vote to seek change. Since losing seats is common, it’s not uncommon for stock prices to hang in there and drift mildly higher through April of the mid-term election year. Then, as the adage says, “sell in May and go away.”
The stock market does not like uncertainly, and there isn’t that much uncertainty for the first four months of a mid-term year. As we get closer to Election Day — around May — the market begins to react to the uncertainty of possible policy changes. It is around then that the market loses momentum and turns down. In the weeks leading up to the election, voting polls tighten up, and the uncertainty has already been priced in. The stock market then typically performs well in November and December. Despite the strong finish, mid-term election years perform more mildly than other years. Since 1942, the S&P 500 has averaged a gain of 6% in mid-term election years, a couple of percentage points lower than the average calendar year.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing investments of more than $500 million. Unless specifically identified as original research or data-gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Full disclosures. Direct inquiries: firstname.lastname@example.org.