U.S. markets bounced back Tuesday after a three-day losing streak during which the three big indexes — the Dow, Nasdaq, and S&P — lost between 2.5% and 4% of their value. Analysts blamed the selloff on an explosion of new Covid infections across the country, along with the Fed's announcement last week that interest rates will likely be going up in 2022.
Amid that kind of uncertainty, it's not surprising that markets experienced some choppiness, but their recovery was swift. By the end of Tuesday, the big three had all recovered more than half of what they lost during the three-day slide.
"The market has had a great year," says Greg McBride, chief financial analyst at Bankrate. "What we've seen in the past few days is not at all surprising, given the strong run the market has had, and the uncertainties about omicron and inflation and the Fed winding down stimulus in 2022."
The strong run he's talking about refers to double-digit growth that the three big U.S. indexes, along with the smaller cap Russell 2000, experienced this year. The S&P has performed particularly well, growing more than 20%. By contrast, the average annual rate of return on the S&P during the five calendar years ending in 2020 was about 16%.
It may feel counterintuitive that stocks would have performed so well despite ongoing uncertainty as the pandemic stretched into its second calendar year. But markets have remained resilient.
"Returns have come pretty easy. We really haven't had much in a way of downside volatility," McBride says. A lot of those good returns can be explained by strong corporate earnings. For example, of the companies in the S&P 500 that have reported third-quarter earnings, 81% came in above analyst estimates, according to market-tracking firm Refinitiv; the long-running average of companies that beat analyst predictions, by comparison, is just shy of 66%.
As a result, it shouldn't too much of a surprise that stocks have continued to grow this year, since the financial bona fides support that kind of growth.
A year ago, it may have seemed inconceivable that U.S. stocks would perform the way they have in 2021. Markets actually lost ground in January, for example, which often sets the tone for the rest of the year. But "corporate profits have been really, really strong," McBride says. "So in that context, no, it's not surprising" that markets have done well.
Video by Tala Hadavi
As the year draws to a close, many traders go on vacation for Christmas and New Years. The period between the two holidays, along with the first few days of January, is often called the Santa Claus rally, because the lack of activity leads to a series of up days for the markets.
That lack of volume can make swings in the market seem much more dramatic than they otherwise would be, experts say. Fewer trades are happening, so the big movements appear more pronounced.
Something similar happened over Thanksgiving. News of the omicron variant broke the week of the holiday, and markets sank on Black Friday: Each of the big three U.S. indexes lost more 2%. However, they had all recovered those losses by the end of the following week.
Whether the Santa Claus rally materializes or not, the underpinnings that made this year such a good one for markets will likely carry into the beginning of 2022, even though there's still a lot of pandemic uncertainty, McBride says.
"It wouldn't surprise me to see more choppiness," he says. "But the underlying fundamentals are really, really good. So look past that, and continue to focus on the long term."
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