CAPITAL MARKETS REVIEW January 2022
Risk Assets Deliver Double Digit Returns in 2021
2021 turned into a solid year for financial markets, as the economy showed its adaptability to recover throughout the various waves of the pandemic. The rollout of vaccines, additional fiscal stimulus, and universally easy monetary polices supported robust returns across the equity and commodity sectors. Conversely, fixed income markets struggled as rates began to rise, causing bond prices to fall.
The top performing asset class for the year was real estate (REITs). The asset class was aided by improved mobility and falling vacancy rates; within the group regional malls, shipping centers and apartments were the top performers. The steady drum beat of inflation echoed throughout the markets this quarter, as it has much of this year. Most energy related commodities were up over 50% for the year, while agricultural prices were up at least 20%, with outliers like coffee up almost 80%.
Equity Markets Surge on Pandemic Recovery
Equity markets continued their move higher during the quarter and finished the year at or near record highs. Earnings growth soared and profit margins approached historic levels due to improving consumer demand and tight supply chains that have allowed companies to pass along higher expenses to the end consumers while wage gains were somewhat muted. Domestic markets again outperformed international markets, with growth outperforming value, and large company stocks outperforming their small cap brethren. Smaller companies have struggled to keep up as they did not have the scale to combat supply chain issues and the ongoing challenge of running a business during a global pandemic.
International markets continued to underperform the United States. Outside of Europe (up 25% for the year), Asian markets struggled with most countries in the region heavily impacted by China. Chinese markets struggled throughout 2021, as increased government regulation impacted many different sectors. The broad U.S. stock market (Wilshire 5000) returned 9.6% in the fourth quarter and 26.7% for the year. Foreign stocks (MSCI EAFE) returned 2.7% and 11.9%, respectively.
Underwhelming Returns Cap Tough Year in Fixed Income
With the increase in rates seen last year, along with market expectations that the Fed will begin raising their benchmark rate in early 2022, fixed income markets underperformed. The Bloomberg US Aggregate taxable bond index was flat for the quarter and finished the year with a -1.5% return. Since the end of last year rates have increased across maturities as the Federal Reserve has announced that it will taper its bond purchases over the coming months. Long-dated US Treasuries posted some of the worst returns as long duration bonds are especially sensitive to rising interest rates.
The one area of fixed income markets that did especially well for the year was high yield/lower quality bonds. This sector benefitted from a lower duration reading than the broad market and an insatiable appetite from yield starved investors. Municipal bonds also managed to produce positive returns over the year. Municipal coffers improved as increased tax revenues resulted from the opening economy and the massive liquidity injections from the Federal Government’s response to the pandemic. Further, demand for municipal bonds was strong resulting from speculation that Biden’s Build Back Better program was likely to pass.