On the surface, world stock markets did well in the fourth quarter of 2021, although we do find some cause for concern as we dig deeper. In the U.S., the S&P 500 Index of large companies gained 11.03%, and while most other segments of the market (defined by size and geography) were also positive, their numbers were significantly less eye-popping. The S&P MidCap 400 index gained 8.00% and the Russell 2000 Index of small companies only rose 2.14%. Overseas, the MSCI EAFE Index for developed economies was up 2.69% (in $US dollar terms), but the laggard was the MSCI Emerging Markets index, where stocks collectively returned -1.31%.
What concerns us most about the strong S&P 500 performance is how it is coming from a very small number of stocks. More than one-third of the dollar gains in this index came from just four stocks – Apple (+25.6%), Tesla (+36.3%), Microsoft (+19.5%), and Nvidia (+42.0%). Because of their size, these companies exert undie influence on the market averages. Of the 1500 stocks in S&P’s broader index of large, mid-size, and small companies, fewer than 30% of the companies actually had stock returns that were higher than the size-weighted average. Among other things, this can be interpreted as investors placing a high premium on liquidity (trading volume) so that they can sell quickly.
The passing of the bipartisan Infrastructure Investment and Jobs Act in November gave a big boot to industrial metal prices and industrial stocks. The bill will allow for $1.2 trillion in funding to be used to repair roads, bridges, railways, municipal water delivery systems, internet service, and more.
The 12-month growth in the Consumer Price Index exceeded 6% in October for the first time since December 1990. As a result, the Fed clearly stated that they were turning hawkish to fight inflation, which they no longer regard as transitory. Chairman Jerome Powell suggested that tapering would be accelerated. The inflation spike also had the indirect effect of delaying the passage of a second phase of fiscal stimulus, called the Build Back Better plan, through a deeply divided Congress.
Overseas markets were held down by the spread of the Omicron variant of COVID-19, particularly China and Hong Kong, where the Chinese government implemented a “Zero COVID” policy and fears of an economic lockdown drove those country indices down.
Continued supply chain disruptions benefited manufacturers of semiconductors (a shortage allowed for price increases), railroads, and private freight (both of which profited from a shortage of long-haul trucks). Internet retailers who rely on these services and who faced delays and/or price increases suffered.
Consumers staying at home instead of traveling was another dominant theme. Winners included companies related to home construction and improvement; losers included resorts and casinos, airlines, and travel services (mainly cruise ships).
COVID-19 had an adverse impact on non-pharmaceutical health care stocks, particularly providers of medical instruments and devices, as many hospitals ceased doing non-essential procedures as COVID patients overwhelmed their resources.
Real Estate, while strong overall, was a mixed bag by property type. The best returns came from storage and logistics facilities, retail, and residential, while underperformers included hotels & lodging and healthcare facilities (COVID treatment isn’t nearly as profitable as elective procedures).
In the world of bonds, the yield on the two-year treasury rose dramatically, from 0.28% on September 30 to 0.73% on December 31, while the 30-year yield fell from 2.08% to 1.90% over the same period. This reduced difference between the two, called “flattening” is generally a bad sign for the economy in general, and financial services stocks specifically, as the spread is an indication of the banking industry’s profitability from making loans.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
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 S&P Midcap 400 Stock Index is an unmanaged index generally representative of the market for the stocks of mid-sized US companies.
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 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 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.