Fourth Quarter 2021 Market Commentary

U.S. Gross Domestic Product (GDP) grew at a slower annual pace in the third quarter (2.3%), adversely affected by rising COVID-19 cases, a slowdown in consumer spending, and supply chain disruptions. The ‘advance’ estimate for fourth-quarter GDP will be announced on January 28. Nonfarm payrolls rose by only 199,000 in December, far below the Dow Jones estimate of 422,000. The unemployment rate dropped to 3.9%, a pandemic-era low, but still above the pre-pandemic level of 3.5% from February 2020. Wages grew at a strong annual rate of 4.7%. Retail sales fell 1.9% in December, a larger decrease than the expected 0.1% Dow Jones estimate, with weak online sales and a drop in spending at restaurants and bars making the biggest impact.

Core CPI, which excludes food and energy prices, rose 5.5% for the year, while headline CPI (including all items) jumped 7%, the fastest pace since 1982. In the spring of 1980, headline CPI peaked at 14.8%, the second-highest level on record. Manufacturing activity expanded slower in December than expected, with the biggest detractors coming from a fall in supplier deliveries as well as a surprise plunge in prices despite high inflation. Home sales rose in November largely due to the hot job market and growing concerns over rising rates in 2022. Fannie Mae is forecasting home sales to decline over the next two years. Mortgage rates are expected to rise, though likely sporadically due to the market volatility that the Omicron variant has brought on.

President Biden signed a $1 trillion infrastructure package in November after lengthy bipartisan negotiations. He also signed into law a bill raising the debt ceiling by $2.5 trillion, allowing the U.S. to cover its obligations into early 2023. Meanwhile, the social spending and climate policy bill, also known as the Build Back Better Act, stalled in the Senate.

The Bloomberg U.S. Aggregate Bond Index remained flat while TIPS rallied with rising inflation. The yield on the 10- and 30-year Treasuries ended the quarter at 1.52% and 1.90%, respectively. TIPS reported the strongest returns of the fixed income market, up 2.4%. Developed international bonds underperformed all other segments of the bond market, down 1.8%. The Fed started tapering its current bond-buying program in November and expects to complete its bond purchases by March 2022. It has signaled multiple rate hikes in 2022, perhaps at an accelerated rate given high inflationary forces.

The S&P 500 had a bullish fourth quarter, jumping 11.0%. All sectors reported solid gains, excluding the communication services sector, which ended the quarter flat. Real estate and technology had the strongest returns, up 17.5% and 16.7%, respectively. Along with communication services, the financials and energy sectors were laggards. Large growth outperformed large value while small value outperformed small growth. The forward P/E for the S&P 500 ended the quarter at 21.2x, above the 25-year average of 16.8x. The index’s 10 largest stocks traded at 33.2x.

Developed international markets trailed U.S. markets while outperforming emerging markets (EM). The MSCI World ex-USA Index (which includes developed countries) and the MSCI ACWI ex-USA Index (which includes developed and EM countries) increased by 3.2% and 1.9%, respectively. EM equities declined by 1.2%. Latin American and EM Asia had negative returns, down 2.5% and 0.9%, respectively. China continued its decline, falling 3.2% in the quarter, amid concerns over regulatory crackdowns imposed by the Chinese government.

The Bloomberg Commodity Index fell modestly in the quarter. Natural gas prices dropped 31.0% after jumping in the prior quarter given supply concerns and rising demand. U.S. crude oil prices remained flat. Gold increased modestly to $1,829/ounce, not far from its year-end 2020 price, where it acted as a safe haven during the first year of the pandemic. REITs jumped in the fourth quarter ending the year up 41.7%.

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