Market X-ray - following the money.

Global Stock Market Indices 

The market X-ray shows that US large cap stocks led the pack in 2021, up 28.3% after its 2020 gain of 18.2%. The 7 biggest stocks in the S&P 500 are tech names, and they account for 23% of the total return of the index.

Not surprisingly, bonds were the laggard with a 2021 loss of -2.5%. Bonds had a strong rally on in late November but it wasn't enough to pull them out of negative territory for the full year. Bonds are widely expected to perform poorly next year as well. James Grant of Grant's Interest Rate Observer calls bonds "return-free risk."

The major US equity indices moved in concert, but the big disappointment last year was small caps, up just 14.2% after being up 21.8% in 2020. 

Emerging Markets also disappointed last year, after good results in 2019 and 2020. Will they regain their momentum in 2022? I think they will, as long as China doesn't blow itself up.

All of the return data in this article is from Morningstar.

Global Asset Classes

Commodities were the best performing asset class in 2021. after losing -7.8% in 2020. Energy stocks have been leading this asset class higher.  US REITs rebounded strongly from a 2020 -4.7% decline. REITS are expected to outperform in 2022. 

Unsurprisingly, bonds - foreign and domestic - struggled to stay above water. And things probably won't improve this year, as central banks stop buying bonds and rates begin to rise in earnest. When adjusted for inflation, real yields are negative almost everywhere you look, and inflation looks set to get worse, at least in the first half of 2022.

Stock Market Sectors

Energy was clearly where the action was last year, up 54.4%. The rebound from the 2020 decline of -33% is breathtaking. The same can be said for financials, up 34.4% after losing 2% last year.  Both energy and financials are expected to outperform in 2022.

Consumer Discretionary stocks led the pack in 2020, up 48.4%. But last year they struggling to keep up with the S&P 500 index. Consumer Staples and Utilities are lagging as investors continue to focus on "reopening" sectors. Utilities have recently been making new highs, so perhaps it's time to take another look at this perennial underdog. 

Stock Market Factors

The market X-ray shows that High-Beta stocks were the clear winner among factors in 2021, up 39.9%. And they were up 25.6% in 2020, second only to Momentum stocks, which were up 29.2% in 2020.

Money flowed out of small cap stocks this year, and much of it went into Value names. The rest of the factors ended in a virtual tie for 2021, making life difficult for factor-based funds and ETFs. (Our factor strategy was up 28.1% in 2021.)

Commodities

After spending years at the bottom of the tables, Natural Gas, Gasoline, and Crude Oil now led the pack. Gold and Silver ended up in last place after big gains in 2020. One narrative that seems to be gaining popularity is that today's investors prefer crypto to gold & silver. Crypto is always a wild card, but gold and silver are expected to be weak performers in a rising rate 2022.

Investors are paying up for coffee this year. How high does the price of a cup of coffee need to go before consumers switch to tea?

Foreign Markets

France surged in the final months of 2021 and ended up in first place. The UK edged out India for second place, after a hot streak that fizzled late for India. Russia had been leading the pack at mid-year, but faded in the stretch to come in 5th. Italy came in 4th place.

There were four countries with a negative 2021 return, with China being the worst performer. In 2020 China was up 28.3%. Tensions between China's leadership and the Chinese business community are persisting, and their massive property sector is still wobbly. If I had to pick a favorite for next year, it would be Japan.

Momentum stocks

These stocks are showing strong momentum for 1 month, 3 months, and year-to-date periods. This is a small sample of where the money is going now. 

It's not too late to buy LAND, even after a 136% run in 2021. It has a reasonable P/E and it gets high scores on StockRover for Quality, Growth, and Sentiment.

In fact, all of these momentum names score high or at least above average, and they are not considered expensive relative to earnings growth projections.

Stock Styles

The market X-ray shows that Small-cap value stocks ended in a dead heat with Large-cap growth. This was a surprise to me, given the poor performance od Small stocks in general. I think Small value will continue to do well in 2022. 

Emerging Market Value held onto last place. I think it's poised for a rebound this year.

Alternative Investments

According to modern portfolio theory, adding alternative investments to your asset allocation mix can improve your risk-adjusted returns (Sharpe Ratio) and enhance your diversification. The downside is that most alternatives offer paltry returns. The upside is that they have low correlations to equities, which can help during a sharp market decline. 

Final thoughts

I think global stock markets will continue to rise until the FED and other central banks pull the trigger on rate increases. Investors have known this will happen for a long time, and so far they haven't been very concerned about it. That may change when the first increase becomes a reality.

For 2022, I like energy, financials, industrials and REITs. I tilt towards value rather than growth. I also think 2022 will see a rebound in non-US markets, especially Emerging markets. The wild card is China, which could conceivably tip over into recession if they don't fix their property woes. If China goes down, they could drag much of the developing world with them.

The FED still calls the tune for the equity market, and investors largely believe that they will not allow a bear market to spoil the post-Covid party. However, the new variant Omicron, which was blamed for Friday's steep selloff, may change things dramatically if it should start to spread quickly and widely.

Regarding the stock market, watch for a series of lower lows, followed by failed attempts to make a new high. The dip-buyers have proven time and time again that there is no alternative to stocks. They have been aggressively supporting this market ever since the pandemic low point last year. If they become fully invested, their significant flow of new money into the market could stop.