Overview
After the chaos that ensued in the early days of 2020 and the months that followed, many people, investors included, simply wanted to return to some sense of “normal”, whatever that may have looked like. However, as 2021 unfolded it became increasingly clear that normalcy was still a ways away, both in terms of societal norms and investment-related ones.
Unsurprisingly, the pandemic and its effects still remained front of mind for many investors throughout most of 2021.
Of course, the pandemic wasn’t the only thing that made investment-related headlines. As discussions surrounding climate change continue to intensify, certain companies have attracted renewed attention because of the emissions they produce from their operations. Societal and investor pressure have caused some big oil and gas players to adopt some drastic changes.
This article will go over some of the major events and developments that transpired in 2021, and what sort of lessons investors can potentially learn from them.
Pandemic-Related Insights
Throughout 2021, the COVID pandemic still remained the primary concern for most people. After all, many jurisdictions still had work-from-home orders in place, public gathering areas such as malls and community centres had capacity limits, and vaccines were just beginning to roll out to the masses.
With so much news relating to the pandemic being published throughout 2021, it’s easy for investors to miss some of the developments that pertain to them, or at least developments that offer important insights they otherwise would overlook. That being said, let’s go over what some of those key events were.
Investors Crave Any Sort of Good News, Whatever It May Be
One of the most closely followed stories since the onset of the pandemic was anything related to the development of a vaccine. Whenever positive developments regarding a vaccine were shared, such as successful clinical trials, it seemed that financial markets around the world were quick to jump on this positive news and investor sentiment improved almost instantly.
This apparent relationship between these two things may seem questionable, but findings show that markets did in fact react to the different stages of vaccine development. More specifically, markets reacted positively whenever good news concerning clinical trials was disclosed.
So, what does the development of a vaccine have to do with investors? It serves as yet another demonstration that investor sentiment is heavily driven by short-term emotions and that any sort of good news, no matter how small, is quickly gobbled up and interpreted as a sign that things will get better, even if the evidence supporting that sentiment is paper thin.
It didn’t matter if a given vaccine was still a long way away from receiving final approval, the mere prospect that things might return to normal in the near future was enough to get investors’ hopes up and subsequently send market indices soaring.
Any investor with a long-term time horizon understands that, although these short bursts of euphoria are nice to experience, what ultimately matters is that these small wins amount to something more enduring. Just because there’s good news going around doesn’t guarantee everything will become better – the only thing good news does is hints that things could potentially improve.
Successful clinical trials were nice to see, but if a vaccine was ultimately rejected then all that excitement will have been for nothing, and investors end up back at square one trying to look for signs that financial markets will rebound.
Many investors seem to be perpetually deprived of good news, and as a result, are quick to make big decisions whenever they hear of any positive developments, regardless of whether those decisions were carefully thought out or not. Such a reckless strategy will quickly prove to be fatal if the good news that investors were betting the farm on quickly fizzles out and amounts to nothing.
Knowing to Differentiate Between Real Growth vs. Recovery
While many investors closely followed any and all vaccine developments in search of any sort of good news, that wasn’t the only thing they turned to in hopes of hearing something positive. Another thing investors kept a close eye on was job reports.
After all, job numbers can roughly be interpreted as a measure of economic health. When economic conditions are strong, businesses are generating an abundance of revenue, and as a result, go on to hire more people. However, when the economy isn’t doing so hot, companies may choose to slash expenses by laying people off, or by holding off on hiring altogether.
With that in mind, it’s not surprising that investors were quick to gobble up job reports throughout 2021 to see if economic outlooks were improving or not.
Throughout 2021, the U.S. and Canada both reported strong job numbers throughout the year as COVID was slowly but surely brought under control and as vaccine inoculation continued to rise throughout the world. Unsurprisingly, many investors took this as a sign of good news and market indices were just as quick to react.
While robust job numbers are certainly encouraging, it’s important to ask: are these gains the result of organic growth (i.e., businesses are indeed growing due to favourable economic conditions) or is this simply the result of people who were unemployed during the pandemic and are now returning to the workforce?
Virtually every job report discloses the current unemployment rate (or at least makes some mention of it) and discusses how the current rate has changed based on what it was previously. During the pandemic, the current unemployment rate was routinely compared to what it was “pre-pandemic”.
If the current employment rate is always being compared to what it was before the pandemic struck, and if it’s falling relative to that figure, then that means the jobs being gained aren’t due to growth, but rather because the economy is reopening again and people who were previously out of work are now returning to their former roles.
Recovery is good to see, but from an investment point of view, this doesn’t necessarily mean that businesses are growing and new investment opportunities will soon pop up. It’s easy for the economy to look like it’s “growing” when the only direction it can really go is up because it’s already at rock bottom.
Similarly, it’s easy for businesses to mislead investors by saying they’re experiencing “record growth” when in reality they’re simply heading back to where they started. It would be wise for investors to assess what exactly they’re witnessing, otherwise, they may make decisions based on false pretenses.
New Variants (Or Any Bad News, for That Matter) Are Quick to Shoot Down Optimism
Just as investors are quick to become optimistic over anything remotely positive, so too are they quick to proclaim that the sky is falling when they hear of any bad news or adverse developments, no matter how minor they may be.
As vaccines were finally beginning to roll out and hope of returning to some form of normalcy was starting to pick up, the virus began to mutate, with two prominent variants garnering the most attention: the Delta and Omicron variants.
As the Delta variant spread in the first half of 2021, it was quickly becoming the dominant strain. Of course, financial markets caught wind of this, and the growing uncertainty culminated in a steep market decline in July 2021 as investors worried that the continued spread of this new variant would further delay the reopening of economies.
Eventually, the worries died down and financial markets more or less rebounded, but then the Omicron variant reared its head, and once again markets tumbled down as the same fears that investors had with Delta were reignited.
One of the major fears investors had was the belief that these variants would delay the re-opening of economies and that recovery efforts would be quickly undone. All it took for investors to panic was to believe that something might happen, even if there was no tangible evidence to support those speculations.
Financial markets around the world were fuelled primarily by emotion, speculation, and myopia throughout most of 2021, and investors who were foolish enough to succumb to their emotions would’ve been in for quite the ride.
However, investors who were able to keep their emotions in check and ignore the noise would’ve realized that all the hysteria ultimately amounted to nothing, and if they simply stood their ground and looked at things logically then they wouldn’t have taken part in the mass-selling that other investors did.
Intensified Pressure on Climate-Related Initiatives
In recent years, discussions surrounding climate change and ways to combat it have grown increasingly fiercer by the day. It seems that every day another company introduces a new climate-based initiative, new legislation is passed to try and curb emissions, or even more ambitious climate goals are set.
Caught in the middle of all this discourse are companies that produce emissions as a result of their operations, the most common target by far being oil and gas companies.
Throughout 2021, there were a few notable developments regarding oil and gas companies. Some of those developments were:
- In May, ExxonMobil lost two Board seats to activist hedge fund Engine No. 1 in a bid to try and reform Exxon’s climate strategy.
- In May, Chevron investors voted 61% in favour of cutting Scope 3 emissions.
- In October, Shell set a new goal to halve its emissions by 2030.
- In June, five major Canadian oil producers (CNRL, Cenovus, Imperial, MEG Energy, and Suncor) formed the Oil Sands Pathways to Net Zero initiative.
Arguably, these developments took place as a direct response to the mounting pressures these companies faced from members of the public and their own shareholders to address climate change.
On one hand, this shows that contrary to what some investors may believe, they do have the ability to affect major changes. Engine No. 1, the investor that brought forth the motion to replace Exxon’s Board members, is a relatively small hedge fund, yet they were still able to achieve their goal by rallying the support of other, larger investors.
It’s very easy for small investors to feel powerless because of their virtually non-existent influence, but if they can garner enough support then even the most obscure proposition may become reality.
On the flip side, this may be a potential issue because shareholders may be able to push initiatives that, although sound good in theory, may in reality end up being highly detrimental to a company’s operations, and in turn damage its investment merit.
Going back to our focus on oil companies, reducing emissions is an important thing to do to minimize environmental impact – not much debate there. Because of that, they’re always looking for new ways to maintain (or even increase) production levels while simultaneously cutting emissions. However, overly aggressive reduction targets may leave these companies no choice but to drastically slash their production too, which could inflict a very deep wound on their financial health.
As climate change discussions continue to ramp up in the coming years, it will be interesting to see how companies respond to external and internal pressure while also making sure shareholder value isn’t decimated in the process.
Wrapping Up
Many investors wanted 2021 to be a relatively quiet year, and compared to 2020, it mostly was. There were no mass lockdowns, no sudden layoffs in the blink of an eye, and no circuit breakers that needed to be triggered at financial exchanges.
However, there were still a few notable events that happened, meaning there were still lessons to be learned by investors.
For many investors, the pandemic still took up the bulk of their attention, and markets were quick to rise and fall based on whatever news made it to the headlines.
Discussion surrounding climate change has intensified in recent years, and because of this, certain companies found themselves subject to increased pressure and scrutiny from the public, and even their own shareholders.
Though not as extensive as in 2020, there are still key takeaways that investors can learn from in 2021, and keep in mind as they continue moving forward.
