Year-End 2021 Market Recap

SARS-CoV-2: The world experienced a number of twists and turns in the pandemic during the course of 2021. Vaccine rollouts during the first half of the year drove case counts lower in much of the developed world. The summer and early fall were dominated by the delta variant, which proved especially deadly for the unvaccinated. Omicron emerged in late November and quickly became dominant worldwide thanks to its ability to evade the initial protection from vaccines. Thankfully, evidence soon emerged that existing vaccines (and especially boosters) still provide significant protection against severe disease and death, and also that omicron is more likely to cause mild covid even in the absence of any protection from vaccines or previous infection.

Economy: The US economy grew rapidly in the first half of the year, but the pace of growth slowed in Q3 as the delta variant snarled supply chains worldwide. At year-end, consensus estimates for 2021 US GDP growth stand at +5.6%, which would be the highest since 1984. Housing and labor markets remain strong, jobs are plentiful (even if workers are not), household and corporate balance sheets are flush with cash, and demand for most goods and services is robust. At the same time, supply chain  bottlenecks and persistent labor shortages are causing inflation to run hot, at levels not seen in the US in more than 30 years.

Bond market: Bonds had a challenging 2021 as yields began to normalize from ultra-low levels coming into the year. But despite much hand-wringing about inflation, 10y and 30y Treasury yields actually peaked in March and the curve flattened as the year progressed. By year-end, investors were pricing in three rate hikes in 2022 as the Fed rapidly winds down its asset purchase programs. Meanwhile, credit spreads compressed as pandemic-driven default risk abated, cushioning price declines for investment grade corporate bond holders and generating strong returns in riskier high yield bonds.

Stock market: US stocks capped an excellent year with a strong December finish. Outperforming sectors in 2021 included energy (+54.4%), real estate (+46.1%), financials (+34.9%), and tech (+34.5%).  International stocks lagged, particularly emerging markets which collectively finished slightly lower on the year. Much of the drag in E/M came from China, which experienced multiple waves of regulatory scrutiny that caused investors to dial back their growth assumptions for many Chinese companies.