The Quarter in Review | 4Q 2021
TOPLINE TAKEAWAYS FOR FOURTH QUARTER, 2021
U.S. economic growth slowed sharply in the third quarter amid a flare-up in Covid-19 infections, but with activity picking up in the fourth quarter, the economy remained on track to record its best annual performance since 1984. GDP increased to 6.9 percent for the quarter and 5.7 percent for the full year. Unemployment fell to 4.2 percent, the lowest since February 2020.
FOURTH QUARTER RETURNS
Equity markets around the globe were mixed for the quarter. U.S. markets surged up +9.28 percent. This compares to International Developed Countries, up +3.14 percent, and Emerging Markets that declined -1.31 percent.
During the first half of the year, U.S. value stocks appreciated significantly and outperformed growth stocks. In the second half, returns were reversed with growth outpacing value.
A globally diversified portfolio of 50/50 equities and fixed income returned +2.82 percent for the quarter.
FIXED INCOME
Fixed income markets experienced more tepid returns than the equity markets, with the Bloomberg U.S. Aggregate Bond Index returning a mere +0.01 percent for the quarter and -1.39 percent for the year. Corporate bonds generally outperformed their government counterparts.
A rapidly improving labor market and persistent inflationary pressures have pushed the Fed to adopt a more hawkish stance toward monetary policy. At its January meeting, the FOMC stated it will “soon” be appropriate to raise the Fed funds rate. These statements pave the way for an initial rate hike at its March meeting, signaling the potential for multiple rate increases in 2022 and 2023.
ALTERNATIVE INVESTMENTS
The advance in commodity prices slowed, consistent with peaking global growth and ongoing weakness in Chinese growth. While the demand for oil continues to recover, supply has been curtailed by OPEC and a slow return of U.S. production capacity. The Bloomberg Commodity Index declined in the fourth quarter by -1.56 percent yet still achieved strong gains for full year, up +27.11 percent.
Increases were led by Soybeans and Zinc, up +20.88 and +19.57 percent. Natural gas and sugar prices were the worst performers, down -39.89 and -7.18 percent, respectively.
Global Real Estate Investment Trusts (REITs) outperformed all asset classes, up +12.35 percent for the quarter and +33.75 percent for the year.
THE ECONOMY AND JOBS
GDP growth in Q4 accelerated from the Q3 low of 2.3 percent to a robust 6.9 percent (5.7 percent for the full 2021 calendar year). While this was the fastest annual growth since the 1980s, an anticipated recovery from the pandemic was always going to take off. The economy was stymied for large parts of 2020 (thus creating easy year-over-year growth comparable); the government poured unprecedented amounts of cash out to businesses and consumers alike; and the Federal Reserve flooded the economy with liquidity.
However, when you start to look under the numbers a different story emerges. By far the biggest contributor to Q4 GDP growth (4.9 percentage points) was a build-up of inventories. This means retailers and other businesses were restocking empty shelves not making sales. There’s probably more inventory build-up to come due to shortages across the economy, but the fourth-quarter increase is unsustainable.
Unprecedented fiscal stimulus from both the previous and current administrations has proven to be a powerful accelerant for the economic recovery. Legislation passed in the last two fiscal years has added $5.3 trillion to the economy. To provide perspective, total GDP in 2021 is expected to come in around $23 trillion. This stimulus will drop off sharply in the current fiscal year as the U.S. has to begin figuring out how to work itself off of this artificial “sugar high.”
The surge in GDP has been mirrored by a rebound in the labor market as the economy reopens. After shedding an astonishing 22.4 million jobs between February and April 2020, the economy has now recovered 18.4 million jobs or 83 percent of the total pandemic loss. Unemployment has dipped below 4 percent and for those with a college degree or higher, the unemployment rate is now at a historic low, approximately 2.0 percent.
INFLATION
Inflation climbed to a 39-year high in December, now registering at 7 percent. This was due to a strong rebound in consumer demand colliding with continued supply challenges. Real (meaning inflation adjusted) disposable personal income decreased 5.8 percent compared to a year earlier.
Inflation is also impacting savings rates. Personal saving was $1.34 trillion in the fourth quarter, down over twenty percent from $1.72 trillion in the third quarter, as people are now having to use their planned savings on basic expenses because they cost more.
For investors worried about the impact of inflation on their portfolios, it is important to remember that U.S. stocks since 1991 have generally provided returns that outpaced inflation. This is a valuable reminder for those concerned that today’s rising prices will make it harder to reach long-term financial goals.
SUMMARY
It was a year of uncertainty and anticipation, of hopes for a return to a degree of normalcy following the onset of the COVID-19 pandemic in 2020. And it was year that showed, again, the difficulty of making investment decisions based on predictions of where markets will go – as well as the enduring benefits of diversification and flexibility.
Coming out of 2020, investors sought signals as to which way the global economy was headed. The distribution of vaccines and the easing of lockdowns were followed by an economic rebound, but the emergence of new variants would be a setback for the recovery. Despite these challenges, global GDP grew, completing the transition from recovery to expansion and eventually surpassing its pre-pandemic peak.
Still, the recovery would be accompanied by labor shortages, supply chain issues, and rising inflation. Prices increased especially rapidly in areas such as food and energy, and the U.S. consumer price index jumped 6.81 percent from year-earlier levels in November, a rise unseen in nearly four decades. The media was filled with debates about where inflation would go, what was causing it, how long it might last, and what could, or should be done in response.
As we reflect back to where we were 18 months ago, who would have thought the recovery would have occurred this quick with such strength.
Having core principles to lean into – during good times and more difficult ones – were, and remain, critical to managing your investments through these challenges.
For us, this involves:
Having an Investment PLAN
Aligning your portfolio from both a RISK and GOALS perspective
Understanding HOW you are invested and WHY
Staying DISCIPLINED and PATIENT
There may be tendency to think when markets reach a new high it is a signal that stocks are overvalued or have approached a ceiling. Such concerns may be especially potent now, with the S&P500 having reached record closing highs throughout 2021. However, investors may be surprised to find that average returns one, three and five years after a new month-end market high are similar to average returns over any one, three or five-year period (see the attached summary from Dimensional Funds).
Sticking with your plan through a volatile period helps put you in the best long term position to capture a market recovery.
Remember, we’re here to help. This also is where the time invested upfront with each of you shows its value. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan. Formulating a solid and adaptable financial plan together and discussing liquidity, cash flows, and reserves, provides the solid footing needed for times like these with many changing facets.
We are grateful for the opportunity to work with each of you. As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss.
We wish you, your families, friends, and colleagues all the best as we anticipate and look forward to Spring.
Please follow this link to read the complete Quarterly Market Review | 4Q 2021.