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4th Quarter 2021 Market Review

The last week of the year was a quiet trading week, yet S&P 500 index returned 0.87% and closed near all-time highs. In total the S&P 500 index returned 28.68% in 2021. Cyclical sectors like Energy (+54%) , Real Estate (+56) and Financials (+34%) outpaced the broad market in 2021. While Utilities, Consumer Staples and Industrials were the laggards, Biotech (State Street Index -22%), the FANG stock basket ( Amazon effectively flat for the year while Netflix was up 11% and Apple up 33%) and most non-vaccine health care underperformed significantly. Outside the US the MSCI All World Ex US index was up 7.82% and the MSCI Emerging Market Index was down 2.47%. Many Chinese stocks that trade in the US, including Alibaba, were down over 50% on Chinese control concerns. According to analysts generally expect the S&P500 to either fall 4.7% or on the other end appreciate 17.8%. Perhaps the truth will be somewhere in between.

In the bond market, the 10-year benchmark US Treasury bond yield edged up to finish the year yielding 1.51%. This was a significant increase from the start of the year ( .91%) and led to a negative total return on the US Treasury of 3.46%...or approximately 3 years’ worth of the current bond’s coupon. Inflation, driven by energy, food and housing accelerated to over 6.8% and reached the highest level since June of 1982. The Federal reserve which has held their short-term rates at zero for the last few years has now signaled that they expect to raise their rates 3 times in 2022, to .75%. Despite these facts the 10-year Treasury yield still stands below the 10 year average of 2.04%. Factory work stoppages during the pandemic, coupled with our now swift economic recovery and poor policy decisions, have created an unprecedented number of shortages, of everything from workers to used cars to avocados to palm oil. Among the most economically consequential of these is the shortage of wood products, which prompted the price of lumber to climb 300% above its pre-pandemic price before dropping to a more palatable 160% increase. Oil also had a stellar year, rising from approximately $50 on Jan 1 to over $75 on New Years Eve. 2021 was truly a tale of Ying and Yang.

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