Amid choppy waters over the final quarter that ended with a strong Santa Claus rally, the US stock market finished 2021 with solid double-digit gains for a third consecutive year. Fourth quarter gains of 10.65%, 7.37%, and 8.28% respectively in the S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite indices stood in stark contrast to the still lagging Russell 2000 small company index (up 1.86%). International equity markets continued to underperform the US; developed markets represented by the MSCI EAFE index climbed 2.40% while the long-suffering MSCI emerging markets index declined 1.68% in the final quarter.
For 2021 overall, US large caps dominated the investment landscape from late in quarter one through the remainder of the year. Unlike most of the past several years and particularly COVID-defined 2020, market leadership swung back and forth between the so-called growth and value sectors, as growth shares finished with a slight advantage. Full year returns for the major US equity indices follow: S&P 500 (28.71%); Nasdaq Composite (22.18%); DJIA (20.95%); Russell 2000 (14.82%). Among international developed markets, European blue chips powered the MSCI EAFE index to an 11.78% return while the Japanese market detracted. Emerging markets were a mixed bag, but very poor performance in the heavily-weighted Chinese market dragged the MSCI EM index down 2.22% in 2021.
Bond prices declined in the fourth quarter, with most of the damage occurring on the short-term end of the yield curve. Long-term yields rose much slower than short-term rates, serving to flatten the yield curve. While inflation continues to be a potential anchor on global bond markets, equity traders will certainly be keeping their eyes on the yield curve, as continued flattening could signal a significant economic slowdown and stoke fears of recession. The Bloomberg Barclays Aggregate Bond Index declined 1.54% in 2021.
Looking ahead to 2022, the bricks in the ‘Wall of Worry’ that markets must climb include the extended period over which normal volatility has been lacking, persistent inflation, stretched valuations across asset classes, and of course, COVID-19 pandemic trends and policy responses thereto. The challenging environment for bonds could make diversification tricky, and should dampen investors’ return expectations for the ‘risk-off’ segment of their portfolios.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Market data provided by JPMorgan Asset Management and MarketWatch.com.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.