2021 in Markets: The ‘Wild’ Year That Wasn’t

Raise your hand if you have heard that 2021 was a “wild” year for stock markets.^[i] Or perhaps topsy-turvy, rocky, fearful, choppy or some other synonym for “volatile.” We have seen this characterization in just about all of the year-end retrospectives filling the financial news world this week, which we find a bit perplexing. Yes, a lot happened this year. There were big swings in some companies, sectors and speculative assets like bitcoin. But for the broad market, volatility was shockingly ordinary. Understanding this today can help you see more clearly when actual volatility spikes, which can happen at any time—for any or no reason.

As we write, 2021 has one trading session left, so there is still time for things to get volatile! But as it stands, the S&P 500 has had a calm year by most measures. For one, it didn’t have a bear market (typically a long, deep decline of -20% or worse with a fundamental cause). Nor did it have a correction (a sharp, sentiment-fueled drop of -10 to -20%). It had just two pullbacks of -4.0% or worse—the largest being a -5.2% decline from September 2 through October 4.^[ii] Compare that to last year, with its fastest-ever bear market of -34% in February and March and a near-correction in September.^[iii] Or 2018, with its twin corrections.

Stocks’ climb was pretty evenly dispersed, too. In the first half, the S&P 500’s total return was 15.0%.^[iv] As of yesterday’s close, the second-half return was 12.3%.^[v] Returns topped 6.0% in three of four quarters, barring a big decline tomorrow, with a flattish Q3 the outlier. The MSCI World Index charted a similar course, albeit with somewhat milder returns due to large Tech and Tech-like firms’ lower weight in markets outside the US.

Day-to-day volatility also took a lot of time off this year after working overtime in 2020. Last year, there were 109 trading days with moves of 1% or more in either direction—the 13^th most on record.^[vi] This year? Just 55, smack in line with the median (54).^[vii] That includes seven moves of 2% or more up or down, basically matching the median of eight.^[viii] And there were zero moves of 3% or greater up or down, in line with the median, which is one.^[ix] Overall, 2021 was that rare treat: a year with average wiggles and far above-average returns.

Now, there was plenty of volatility under the hood, which may explain some of those year-end retrospectives. In addition to meme stonks’ well-documented swings, we had a big leadership rotation in mid-May, when value’s countertrend rally ended and growth reclaimed the baton. Through May 14, global growth stocks were up 3.7% on the year, paling in comparison to value’s 16.1%.^[x] Since then, growth has leapt 17.7% higher, while value is up just 5.1%, leaving the styles neck and neck for the full year.^[xi] Energy stocks also took a wild ride, rising 31.1% from the year’s start through March 12, slowing down in the spring, tumbling -15.6% in the summer, then soaring as oil prices spiked in October before drifting lower to finish out the year.^[xii] Tech’s returns were also more varied, arriving predominantly in Q2 and Q4. Even more niche, special-purpose acquisition companies boomed and busted, as did bitcoin. Twice. But there is always some wildness in narrower categories, and we don’t think this year’s version is terribly noteworthy.

Volatility isn’t predictive. Nor is its absence. But the waters won’t stay quiet forever. While we think the bull market likely continues, at some point, volatility will spike. We might get more and bigger pullbacks, perhaps even the bull market’s first correction. For folks lulled into relative comfort by a calm 2021, it might feel quite jarring.

So reframe your perspective. Despite how so many narratives portray it, 2021 was placid for stocks. Base your expectations on bigger volatility and steel yourself for it now, lest renewed wobbles catch you off guard and tempt you to make sudden, ill-conceived moves. If those swings never come, that is fine. But if they do, you will have the right mindset in advance.