Stocks end 2021 on a weak note, still a big annual gain

Stocks ended a quiet trading day today with modest losses, even as Wall Street closed the books on another record year.

The S&P 500 ended with a gain of 26.9% for the year, or a total return of about 29%, including dividends. That’s almost as much as the benchmark index that won in 2019. The Nasdaq composite, driven by Big Tech stocks, climbed 21.4% in 2021. The Dow Jones Industrial Average gained 18.7%, with Home Depot and Microsoft leading the way.

“It’s the third year in a row with incredible gains,” said JJ Kinahan, chief strategist at TD Ameritrade. “The market itself was just amazingly strong.”

A wave of consumer demand fueled by the reopening of economies pumped up corporate earnings more than expected in 2021, helping to keep investors in a buying mood. Wall Street also got a boost from the Federal Reserve, which kept its key short-term interest rate close to zero all year. As a result, corporate borrowing costs remained low and equity valuations high. Investors expect the Fed to raise interest rates next year.

There was also a lot of interest in so-called ‘meme stocks’, in which large groups of individual investors bought up shares of beaten companies like GameStop and AMC Entertainment, causing institutional investors such as hedge funds to lose billions. The rising stock market also sparked an explosion in IPOs, including online broker Robinhood and electric vehicle manufacturer Rivian Automotive.

Along the way, the S&P 500 set 70 all-time highs, the most recent on Wednesday. In the post-World War II era, those are the most new highs for the index since the 77 it set in 1954.

The market continued to set new highs despite numerous challenges, including rising inflation, global supply chain disruptions and outbreaks of more contagious variants of the COVID-19 virus.

“While there are a lot of things that people have been nervous about all year and are still nervous about as we move into ’22, at the end of the day the US (stock) market still seems to be the best game in town. Kinahan said.

Still, the rapidly spreading ommicron variant and uncertainty about global supply chain disruptions persist throughout the year. So is the impending end of the Federal Reserve’s easy money policy.

The central bank has signaled plans to accelerate its monthly bond purchases, which has helped keep interest rates low. The shift in policy provides the basis for the Fed to start raising interest rates as early as the first half of next year.

Trading was very slow on Friday, with most of Wall Street on vacation and many fund managers already closing their positions for 2021.

Major indices spent much of the day alternating between small gains and losses. The S&P 500 fell 12.55 points, or 0.3%, to 4,766.18. The Dow fell 59.78 points, or 0.2%, to 36,338.30. The Nasdaq fell 96.59 points, or 0.6%, to 15,644.97 points.

The Russell 2000 Smaller Company Index fell 3.48 points, or 0.2%, to 2,245.31. The index ended the year with a gain of 13.7%.

The 10-year Treasury yield held steady at 1.51% after the bond market closed at 2 p.m. Eastern ahead of New Year’s Day.