“The only difference between death and taxes is that death doesn't get worse every time Congress meets.” - Will Rogers
Q4 2021 Market Highlights
Most major indices were positive or only slightly negative
- S&P 500 +11.03%
- Russell 2000 +2.14%
- MSCI EAFE $US +2.69%
- MSCI Emerging Markets $US -1.31%
- Bloomberg US Aggregate Bond +0.01%
- Bloomberg High Yield Corporate +0.71%
- Bloomberg Commodities -1.56%
- Dow Jones US Select Real Estate +17.22%
Newsworthy events that drove the market included:
- The passing of the bipartisan Infrastructure Investment and Jobs Act on November 6. This will allow for $1.2 trillion in funding to be used to repair roads, bridges, railways, municipal water delivery systems, internet service, and more. This gave a big boot to industrial metal prices and industrial stocks (the S&P Materials index gained 15.2%).
- 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 in an attempt to fight inflation, which they no longer regard as transitory. Chairman Jerome Powell suggested that tapering would be accelerated. “Tapering” refers to a slowdown in the level of asset purchases (mostly Treasury bonds held by non-government entities), which in turn slows down the growth in the money supply. Less growth in the money supply traditionally results in higher borrowing costs, which in turn reduces demand as a means to control inflation.
- 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.
- The spread of the Omicron variant of COVID-19. This had more of an impact on overseas markets, 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 -6.06% and -3.55%, respectively. European governments were also expected to implement measures more extreme than those in the United States.
- Additional events also weighed on foreign markets. A Russian buildup of troops on the Unkraine border became a source of tension with the United States. Chile elected leftist Gabriel Boric as their next President, and he has promised to work with the Communist Party to present a united front. Brazil’s central bank hiked interest rated three percentage points in the quarter to stave off inflation.
In addition to the large-cap bias, there were a few other noticeable themes in what did well and what did poorly this quarter, including:
- Supply chain disruption. Beneficiaries from logistical issues included manufacturers of semiconductors (a shortage allowed for price increases; Nvidia cited above, also Qualcomm +42.3% and Broadcom +38.1%), railroads (which picked up the slack caused by a shortage of trucks; Union Pacific +29.1%, CSX +26.7%, Norfolk Southern +24.9%), and private freight services (UPS +18.3%, FedEx +18.3%, JB Hunt +22.4%). Internet retailers who rely on these services and who faced delays and/or price increases suffered.
- Consumers staying at home instead of traveling. Winners included Hope Depot (+26.9%), Lowe’s (+27.8%), Procter & Gamble (+17.6%), D.R. Horton (+29.4%), and Lennar (+24.3%). Losers included resorts and casinos (-4.5% as a group), airlines (-11.5% as a group), and travel services (TripAdvisor -19.5%, Norwegian Cruise Lines -22.4%, Carnival Corp -19.6%, Royal Caribbean -13.5%).
- 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. Impacted stocks included Medtronic (-17.0%), Zimmer Biomet (-13.0%), Boston Scientific (-2.10%), Becton, Dickinson (+2.7%), Stryker (+1.7%), and ResMed (-1.0%).
- Real Estate, while strong overall, was a mixed bag by property type. The best returns came from storage and logistics facilities (+32.5% as a group), retail (+16.5%), and residential (+16.3%), while underperformers included hotels & lodging (+2.4%) and healthcare facilities (+4.5%; 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.
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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.
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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.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
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The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
The Bloomberg Barclays U.S Corporate High-Yield Bond Index is an unmanaged market value weighted index composed of fixed-rate, publicly issued, non-investment grade debt.
The Bloomberg Commodity Index is a broadly diversified commodity price index made up of exchange-traded futures on physical commodities which are weighted to account for economic significance and market liquidity.
The Dow Jones US Select Real Estate Index is designed to measure the performance of real estate securities publicly traded in the U.S.
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.
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 S&P 1500 Index is a stock market index of all stocks in the S&P 500, S&P 400, and S&P 600.
The S&P 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.