To close 2021, investors cheered on the new year. Measured by the MSCI ACWI, global equity markets gained about 19% for the year. During the final week of trading, large-cap U.S. stocks shrugged off concerns about the Omicron variant, and many of those stocks went on to set new all-time highs. Interestingly, this rise wasn’t echoed equally by all stocks, some of which peaked earlier in the year. Domestic small-cap stocks peaked in November, developed international stocks in September, and emerging-market stocks, still pressured by a Chinese regulatory crackdown, peaked in February.
The bond market gave investors less to cheer about in 2021. As measured by the Bloomberg U.S. Aggregate Bond Index, bonds lost 1.5% for the year. Pressure on long-term bond prices in particular may not ease immediately as the Federal Reserve winds down its asset purchases and signals tighter policy next year. For these reasons, we continue to emphasize shorter-maturity bonds. The bond market doesn’t seem overly concerned with recent inflation data. The ten-year bond is still paying nearly a quarter of a percent less than it did at the end of March when inflation was still below 3%.
It’s worth noting that diversification tests investors in different ways. It’s easy to get frustrated by an asset class that struggles. It’s also easy to become convinced that an asset class that has done well will do so indefinitely. Take U.S. technology stocks, for example. The S&P 500 is increasingly driven by them. The Nasdaq and S&P 500 have begun trading in lockstep while the less tech-heavy Dow Jones Industrial Average diverges. The performance of technology stocks has certainly benefited our clients, but we hold the concern that their dominance in the U.S. market is quietly reducing diversification. This potential source of volatility has our attention in 2022.
The U.S. economic recovery continues and has been largely immune to the concerns surrounding the Delta and Omicron variants of COVID-19. Holiday retail sales, for example, were 8.5% higher than last year. Initial jobless claims dramatically improved in December, declining to their 2019 level of about 200,000/week. The most recent data show the U.S. unemployment rate is 4.2%, extremely low by historical standards and approaching the pre-pandemic low of 3.5%.
As we start the new year, we send you warm wishes for a safe and healthy 2022. Please reach out if we can be of service. We are here for you.