Q4 2021: “Tracking the Recovery: Inflationary Pressure a Symptom Not the Cause”

The year ended on a highly upbeat tone for investors as equities rose to new heights against a backdrop of inflation and a prolonged pandemic. This marked the acceleration of many market and economic trends for the year including the dominance of U.S. large-cap stocks, the rebound in sectors such as real estate inflationary pressures, a return to full employment, and a broad move toward the post-pandemic economy. So, while inflation dominated the narrative for the quarter, it is a symptom of other global economic issues rather than the underlying cause.

Market Performance

Amid continued uncertainty, this was unexpectedly a great quarter and a remarkable year for investing - especially for equities. ACWI was up 7% this quarter and 19% for the year, marking double-digit gains for three years in a row. U.S. markets did particularly well with S&P 500 reaching new highs, ending the year with a 27% gain. International markets finished positively overall – though to a lesser extent, up 8% as European markets outpaced Asia-Pacific markets by 13% and emerging markets posted muted returns, pulled down by China.

Notably, size drove returns this year, with mega-cap stocks leading the market, and small-cap stocks up about half as much. While large-cap growth performed on par with large-cap value, small-cap value impressively outpaced small-cap growth by more than 25%, benefiting from the economic reopening earlier this year.

As markets actively look for the next moves of major central banks, the tighter-than-expected monetary policy announced at the Fed’s November meeting complicated the economic backdrop; concerns over long-term inflation were soothed, while tightening prompted uncertainty around future growth. With investors retreating to safer Treasurys during the quarter, the 10-year U.S. Treasury yields declined to 1.52% but were still 60 bps above where they started the year. As a result, U.S. aggregate bonds had a flat quarterly performance with long-duration bonds leading other bond segments, down 1.7% for the year.