Fourth Quarter 2021 Investment Commentary
2021 Q4 Edition
Market Recap
It’s been another remarkable year for the S&P 500 Index, with the index of large-cap U.S. stocks returning a stunning 28.7%. It also dominated U.S. small-cap stocks (the Russell 2000 Index was up 14.8%), developed international stocks (MSCI EAFE Index, up 11.3%), and emerging-market (EM) stocks (MSCI EM Index, down 2.5%) for the year. Much of this outperformance occurred in the fourth quarter, with the S&P 500 gaining 11.0%, compared to 2.1%, 2.7%, and -1.3% for small caps, developed international stocks, and EM stocks, respectively.
A strong dollar, the renewed surge in COVID-19 infections late in the year (particularly in Europe and emerging markets), and China’s policy-induced economic slowdown and stock market decline drove the disparity of returns. The MSCI China Index sank 21.7% for the year and lost 6.1% in the fourth quarter. Chinese stocks comprise roughly 35% of the MSCI EM Index. The MSCI EM ex-China Index gained 10.0% for the year.
Turning to the bond markets, the core bond index (Bloomberg US Aggregate Bond Index) lost 1.5% for the year, as interest rates rose moderately. The benchmark 10-year Treasury bond yield ended the year at 1.51%, compared to a 0.92% yield at the end of 2020. Given the very sharp rise in inflation, most pundits would not likely have predicted such a mild increase in bond yields.
Credit markets fared much better than core bonds in 2021. The U.S. high-yield bond index returned 5.4% (ICE BofA ML High Yield Cash Pay Index) and the floating-rate loan index gained 5.2% (S&P/LSTA Leveraged Loan Index). These returns were consistent with our expectations for a recovering and growing economy.
The above information on indices have been obtained from sources (i.e. Morningstar) we believe to be reliable, but we cannot guarantee its accuracy or completeness. Past Performance is not a guarantee of future results. Investors cannot invest directly in an index. The unmanaged indices shown do not reflect management fees and transaction costs that are associated with some investments. The S&P 500 includes 500 leading U.S. publicly traded companies in industries of the U.S. economy with an emphasis on market capitalizations. The Russell 2000 index tracks the small-cap segment of the U.S. equity universe. The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries in Europe, Australasia and the Far East, excluding the US and Canada. The MSCI Emerging Markets Index captures large and mid-cap representation across 25 Emerging Markets (EM) countries. MSCI EM ex-China Index captures large and mid-cap representation across 24 of the 25 Emerging Markets (EM) countries* excluding China. The ICE BofA Merrill Lynch US Cash Pay High Yield Index tracks the performance of the US dollar denominated below investment grade corporate debt. The S&P/LSTA Leveraged Loan Index is a market-value-weighted index that is designed to measure the performance of the U.S. leverage loan market based upon market weightings, spreads and interest payments.
Certain material in this work is proprietary to Litman Gregory Analytics and is used by Owen Legacy Group with permission. Reproduction or distribution of this material is prohibited and all rights reserved.
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