To quote Freddie Mercury and Queen, “Another One Bites The Dust.” Who would have thought coming into 2021 that the year would have passed as quickly as it did? We certainly did not. We were also quite surprised by the magnitude of the move in the broader domestic stock averages as well as their outperformance as compared to their international counterparts.
For calendar year 2021, all of the major U.S. averages rose by double digits, led by the S&P 500, up 26.89% and then followed by the Dow Jones U.S. Total Market (24.01%), NASDAQ Composite (21.39%), Dow Jones Industrial Average (18.73%) and the Russell 2000 (13.69%). Not too shabby when compared to the iShares MSCI ACWI (Morgan Stanley Composite Index, All-Country World Index) ex-U.S. ETF which has rose by just 7.68% which in turn bested emerging international markets which broke about even in 2021.
Fixed income investors did not fare so well, as the Vanguard Total Bond Market ETF fell nearly two percent while the iShares Core U.S. Aggregate Bond Index declined by a similar amount. In fact, nearly all of the domestic fixed-income, investment grade indices declined on a total return basis during 2021. Pain was also felt on the international front as the Vanguard Total International Bond ETF shed more than two percent. The only port in this “asset allocation rain shower” were non-investment grade or “junk” bonds which are more volatile than investment grade fixed income. (We will not refer to a meager two percent decline as a storm. We will also remind readers that bonds provide stability of principal during times of economic stress and are, for many, essential assets, necessary for proper portfolio construction.) However, this volatility manifested itself to the upside as many of these funds rose by more than three percent last year.
These paltry returns for fixed income investors provided a tailwind to stocks as the acronym TINA, or “There Is No Alternative” became prevalent in investor parlance. Investors believed that they should not settle for low or negative returns from bonds when the stock market rewarded them so. This rationale will not last forever and is something that we will keep an eye on as well move through 2022.
In addition to the above, some of the more notable issues pertaining to the financial markets during 2021 included the fact that the Federal Reserve remained dovish well into the year. It took until late November, while testifying before the Senate Banking Committee, for Chair Jerome Powell to state that it was “probably a good time to retire that word.” That word, transitory, was used by the Fed to describe the longevity of rising inflation. Inflation should remain a front-burner issue well into next year as prices at the retail and wholesale levels as measured by the Consumer and Producer Price Indexes have risen by 6.8% and 9.6% y/y, respectively. At this time, we believe that the rise in labor costs are longer-term or secular in nature while those increases impacting manufacturing and logistics will have a shorter-life.
Calendar year 2021 was also one in which there were no ten percent corrections in the S&P 500, the steepest of which bottomed at around six percent off its all-time high. There were, however several rolling corrections which were felt by those invested in the technology, health care, consumer discretionary, biotechnology, utility and telecom sectors. There also existed a continuous tug-of-war between value and growth. The overall impact of this price action was net positive as it kept valuations reasonable and investor sentiment from overheating.
As we look back, another issue of note during 2021 was the behavioral response of Americans to COVID. More precisely, never underestimate the ability of Americans to adapt and to cope during times of crisis. We witnessed this as the American economy rebounded sharply as more and more vaccines became available and were received. We also witnessed it as many risked their careers and some, their lives, to help others. In our opinion, this is the strength of the American people and why we look forward to see how 2022 unfolds.
