Market Review - Quarter 4, 2021
Source: FactSet financial data and analytics
US equities continued its winning streak driven by ongoing economic recovery and strong corporate earnings. Despite some late-year volatility caused by the emergence of the Omicron variant and elevated inflation, US equities, measured by the S&P 500, gained 28.7% with 70 new all-time record highs¹, second most on record after 1955’s 77 record highs². Notably, 2021 marked the third consecutive year of double-digit gains³. 2021 was also defined by relatively muted index-level volatility, with the biggest pull back of just -5.1% during the year, compared to the historical average of -14.3%⁴. Looking beneath the surface, however, shows that 13% of stocks within the S&P 500⁵ ended the year with flat or negative returns, highlighting uneven performance across US equities.
Source: Factset, CNBC
US equities beat international once again and emerging markets got crushed. International developed markets outside the US had a strong year in local currency, up 19.2%. However, the strength of US dollar reduced the gains to 11.8% in dollar terms. Emerging market equities, on the other hand, fell 2.2% for the year following a correction in the Chinese stock market in the second half of 2021, led by fears of regulatory crackdowns and ongoing COVID disruptions. This caused US equities to outperform emerging markets by the highest in 23 years⁶.
Within US equities, all sectors were positive with double digit gains for the first time since 1995⁷, despite wide gaps in performance. The energy sector was the best performing sector for the year, up 54.6%, led by a rally in crude oil prices. Real estate, financials and technology rounded out the other top sectors for the year. In a ‘risk on’ environment, defensive sectors like Utilities and Consumer Staples underperformed in comparison with gains of 17.7% and 18.6% respectively for the year.
Outside of mega-caps, economically sensitive value segments outperformed growth in 2021 in the US. Small and mid-cap value stocks outperformed large-cap value for the year driven by the ongoing economic recovery. The outperformance of mega technology names led large growth to outperform large value for the year.
Bonds went from hero to zero. US bonds fell 1.5% in 2021, the third worst annual performance since 1976 as interest rates rose for the year⁸. While US bonds struggled, TIPS returned 6.0% as inflation rose faster than expected and lower quality bonds like high yield gained 5.3% as investors stretched to find income. Developed international bonds struggled and fell 7.1% for the year with losses magnified by a stronger dollar.
US REITs and commodities posted strong gains for the year driven by inflation concerns while gold lost its luster. Gold was the top performing investment in 2020, living up to its reputation as a safe haven during the market crisis. However, in 2021, gold fell 4.3% despite rising inflationary concerns as investors favored other investments, including real estate and commodities. Commodities gained 27.1% for the year driven by supply chain disruptions and a surge in energy prices, all contributing to rising inflation. US REITs was one of the best performing investments in 2021, up 41.3%.
[1] A Wealth of Common Sense - 2021 Was One of the Best Years in the Stock Market History
[2] Ned Davis Research - Benchmark Review: Stocks climb ultimate wall of worry
[3] FactSet
[4] JPMorgan - Guide to the Markets® Q1 2022
[5] FactSet
[6] Ned Davis Research - Benchmark Review: Stocks climb ultimate wall of worry
[7] Ned Davis Research - Benchmark Review: Stocks climb ultimate wall of worry
[8] Ned Davis Research - Benchmark Review: Stocks climb ultimate wall of worry
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