In this blog post, I will recap stock and bond performance for equities and fixed income in the U.S. and global markets.
U.S. and Global Equities
The S&P 500 Index was one of the best-performing major indices for the quarter (+11.0%) and the year (+28.7%). While every sector posted double-digit results for the year, returns were mixed in 4Q. For the quarter, Communication Services (0%) was the laggard, while Real Estate (+18%) and Tech (+17%) took the top slots. For the year, the worst sector was Utilities (+18%) and the best was Energy (+55%). Since the market low in March 2020, the S&P 500 is up over 100%.
However, not all stocks enjoyed the same ride. Within the S&P 500, the market capitalization weight of the top 10 stocks in the index reached a record 30.5%, and the P/E ratio of those stocks was 33.2 versus 21.2 for the broad index. Growth stocks outperformed value for the quarter and the year in the large cap space, but mid cap and small cap growth underperformed value for both periods.
The difference in full-year performance across market cap and styles is especially stark. From a pure capitalization standpoint, small cap (Russell 2000: +14.8%) underperformed large (Russell 1000: +26.5%), with outperformance driven by strong results from mega-cap technology, pharmaceutical, and auto stocks. Even more pronounced was the difference between small cap value and small cap growth (Russell 2000 Growth: +2.8%; Russell 2000 Value: +28.3%). The Russell 2000 Value Index was helped by its relatively hefty exposure to more high-performing cyclical sectors such as Energy (+66%), Materials (+30%), and Industrials (+28%). Conversely, Health Care (-21%) is the largest sector for the Russell 2000 Growth Index, and weak results from Communication Services (-11%) also hurt relative results.
Global ex-U.S. stocks were hurt by U.S. dollar strength; the MSCI ACWI ex-USA Index was up 1.8% for the quarter and 7.8% for the year but in local terms it was up 13.0% for the year. The yen sank 10% in 2021 vs. the U.S. dollar, the largest drop since 2014. Japan was up nearly 14% in local terms in 2021 but only 2% in dollar terms. Emerging markets (MSCI EM: -1.3%; -2.5%) did not participate in the stock rally the rest of the world enjoyed. China’s weight in the Index (35%) and poor performance (-6%; -22%) was a key driver. China stocks were hurt by slowing growth and heightened regulation. Brazil (-6%; -17%) was also a notable underperformer. India (-0.2%; +26%) and Russia (-9%; +19%) fell in 4Q but were up for the year. Turkey (-11%; -28%) was the worst performer and the 44% decline in the Turkish lira was also notable. The country is battling high inflation (36% in December) with unconventional monetary policy (lowering rates).
U.S. fixed income returns were literally flat in 4Q (0.0%) and the Bloomberg US Aggregate Bond Index posted an unusual negative result for the calendar year (-1.5%), for only the fourth time since the inception of the Index in 1976. Spread sectors underperformed in 4Q but outperformed for the year. The 10-year U.S. Treasury yield closed the year at 1.52%, up from 0.93% on 12/31/20 but flat over the course of the quarter. TIPS sharply outperformed the Aggregate for the quarter and the year (Bloomberg US TIPS Index: +2.4%; +6.0%) as expectations for inflation rose. The 10-year breakeven spread, which reflects inflation expectations over the next 10 years, was 2.56% as of year-end. The yield-to-worst for the Aggregate Index ended the year at 1.75%. High yield corporates were top performers for the quarter and the year (Bloomberg US High Yield: +0.7%; +5.3%) and the yield-to-worst for this Index was 4.21% as of year-end. Real yields, it goes without saying, are negative for the Aggregate and High Yield indices given the recent surge in inflation. Leveraged loans (S&P LSTA Leveraged Loan Index: +0.6%; +5.2%) also did relatively well. Municipals (Bloomberg Municipal Bond Index: +0.7%; +1.5%) outperformed Treasuries for the quarter and the year, boosted by robust demand. In general, lower-quality securities outperformed in 2021 across the fixed income spectrum.
Developed ex-U.S. market returns were hurt primarily by U.S. dollar strength for the quarter and the year (Bloomberg Global Aggregate ex-US: -1.2%; -7.0%). On a hedged basis (+0.1%; -1.4%), returns were similar to those in the U.S. Emerging market debt indices posted negative returns for the quarter and year. The JPM EMBI Global Diversified Index (-0.4%; -1.8%) performed better than the local currency JPM GBI-EM Global Diversified Index (-2.5%; -8.7%) as emerging market currencies suffered relative to the U.S. dollar.
Broadly, real assets performed well in 2021. The Bloomberg Commodity Index declined 1.6% for the quarter but was up 27.1% for the year. WTI Crude Oil closed at roughly $75/barrel (the low was $12 in April 2020!) and was about flat for the quarter but up over 50% for the year. TIPS (Bloomberg TIPS Index: +2.4%; +6.0%) performed relatively well for both the quarter and the year. REITs (MSCI US REIT: +16.3%; +43.1%) and infrastructure (DJB Global Infrastructure: +7.5%; +19.9%) were up sharply for the quarter and the year. Gold (S&P Gold Spot Price Index: +4.1%; -3.5%) was up for the quarter but down for the year.