Fourth Quarter 2021: There Is No Alternative
Global markets shrugged off supply-chain issues, various Covid-19 variants, and higher inflation in the fourth quarter to finish positive for the year, as the bull market that started in the spring of 2020 rolled on. Large-capitalization U.S. stocks continued their dominance as the S&P 500 ticked off 70 all-time highs, the second most highs ever recorded in a single calendar year. Exceptionally strong earnings and record-high profit margins were some of the catalysts for the stock market performance. Another driver can be summed up by the acronym “TINA” – There Is No Alternative. Investors, unexcited by low and rising fixed income yields, have shunned bonds and poured money into equity funds at record levels.
Supply-chain issues wreaked havoc on the world economy as consumers, flush with cash from record stimulus, shifted spending into consumer goods and away from in-person services. The subsequent inflation, initially contained in supply-constrained industries, has now extended to the broader economy. The resulting consumer price increases, the largest in three decades, forced Federal Reserve Chair Powell to ditch the at-best confusing “transitory” tag during his December testimony to Congress. Chair Powell also announced that the Federal Reserve is increasing the pace of bond tapering, paving the way for interest rate hikes as early as spring 2022. With inflation well above target and the unemployment rate at 4.2% in November, the path to rate raises would seem clear – but Chair Powell cited the Omicron variant and millions of U.S. adults that haven’t returned to the labor force as potential challenges for the economy in 2022.
Outside of the US, developed markets were more muted than U.S. indices but they did see double-digit returns for the year. Emerging markets, weighed down heavily by Covid-19 related closures, global supply chain disruptions, and real estate weakness in China, finished down for the year.