While 2021 began with optimism amid the rollout of vaccines, nearly two years into the pandemic a new wave of anxiety and infection has pushed a return to normalcy into the distance. With the public health crisis dominating daily headlines, stocks finished the year with solid returns as the S&P 500® Index climbed to new records against the backdrop of an improving labor market, strong corporate profitability, and still accommodative monetary policy. The Index extended its streak to seven consecutive quarters of positive returns and has now gained more than 119% since the market bottom of March 23, 2020. Inflation has surged to multi-decade highs, leading the Federal Reserve to pivot to a more hawkish stance and plan a more hasty withdrawal of its monetary stimulus in 2022. Even still, stocks saw little in the way of volatility throughout the year, as only once in 2021 did the S&P 500 pull back more than -5% before recovering to reach new highs.
Supply chain disruptions and labor shortages, partly brought on by a resurgence in COVID cases, contributed to the 6.9% annual rise in the Consumer Price Index in the fourth quarter, the fastest increase since the early 1980s. Meanwhile, wholesale prices spiked even more, as measured by the 9.6% gain in the Producer Price Index. Rising prices could be seen across a broad range of goods, including energy, where a more than 50% increase in the price of oil sent the average price of gasoline higher to $3.48/gallon1. It became clear that the Fed could no longer stand by its expectation of “transitory” inflation, and it took steps to more aggressively rein in price increases. The Fed accelerated the wind-down of its bond purchases (known as “tapering”) and signaled three quarter-point increases in the federal funds policy rate in 2022. In the press conference following the December FOMC meeting, Chair Jerome Powell said “…we got the CPI, which was a very hot, high reading. And I, honestly, at that point, really decided that I thought we needed to—we needed to look at speeding up the taper. And we went to work on that.”
With respect to economic growth, third-quarter GDP registered a more normalized 2.3% annual increase compared to the above-trend readings in previous quarters when the economy was rebounding rapidly from the onset of the pandemic. Growth drivers included a buildup of private inventories and strong consumer spending, particularly in travel and transportation, as well as increases in state and local government spending. A slowdown in spending on motor vehicles and parts, in part due to supply chain issues, weighed on growth in the quarter. The labor market produced strong job gains throughout the fourth quarter, including fewer claims for unemployment insurance and the unemployment rate falling to a pandemic-era low of 3.9% in December. The ISM Manufacturing Index continued to show robust growth in the manufacturing sector through the quarter and ended December at 58.7%. The ISM Non-Manufacturing Index rose to 69.1% in November, its highest level on record,2 before easing back to a still strong reading of 62.0% in December. (A reading above 50 indicates economic expansion while a reading below 50 indicates contraction.)
On the fiscal policy front, Congress was able to extend the debt ceiling and pass the $1 trillion infrastructure bill after contentious debate, but the Biden administration’s $1.7 trillion “Build Back Better” social and climate spending bill was thwarted after the Senate failed to garner enough votes for passage. While a strong economy provides a backbone for corporate profitability and investor confidence, fiscal and monetary assistance is waning. It remains to be seen to what extent the economy will sustain growth in the transition to an environment of decreased policy support.
The S&P 500 Index returned 11.03% in the fourth quarter, capping off the strongest quarter of the year, in which the Index gained 28.71%. According to Factset, S&P 500 companies are expected to have grown their earnings 21.7% in the fourth quarter, which would mark the fourth straight quarter of 20%+ earnings growth. All 11 sectors had positive returns during the quarter with the exception of communication services, which was essentially flat with a -0.01% return. Seven sectors had double-digit returns led by real estate (+17.54%), information technology (+16.69%) and materials (+15.20%). Growth outperformed Value for the third straight quarter with an 11.64% return for the Russell 1000® Growth Index compared to the 7.77% return for the Russell 1000® Value. Small caps hardly participated in the rally with just a 2.14% return for the Russell 2000® Index. After a strong first half of the year small caps struggled to keep pace as the Index returned -2.31% in the second half compared with 10.01% for the large cap Russell 1000® Index. Outside the U.S., a strengthening dollar continued to cause headwinds for foreign developed markets as the MSCI EAFE Index underperformed with a 2.69% return in the quarter. Emerging markets also underperformed with a -1.31% return for the MSCI Emerging Markets Index as weak results in markets such as China, Russia, and Brazil hurt performance during the quarter.
The Bloomberg U.S. Aggregate Bond Index, a broad measure of investment grade bond market performance, returned 0.01% during the period. This marked the second straight quarter of muted performance, as interest rates were volatile amid shifting inflation expectations and a hawkish pivot from the Fed during the second half the year. The yield on the 10 Year US Treasury fluctuated but ended the quarter nearly unchanged at 1.51%. Investment-grade corporate bonds were modestly positive, while high yield corporates outperformed with a 0.71% return for the Bloomberg Corporate High Yield Index. The Barclays Municipal Bond Index outperformed with a 0.72% return. Agency mortgage-backed securities (MBS) underperformed with a -0.37% return as the near-term tapering of the Fed’s bond purchases weighed on the sector. Lastly, foreign bonds lost -1.18% as measured by the Bloomberg Global Aggregate ex U.S. Index.
1 Factset, U.S. Department of Labor
2 Factset, ISM, Index inception 1997
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Please note that all performance data and comments are
for the period from October 1, 2021 through December 31, 2021. Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of AMG Funds and are not intended as a forecast or guarantee of future results. The information and opinions contained herein are current as of December 31, 2021 and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy, completeness, and interpretation are not guaranteed.
The Russell 1000® Value Index is a large-cap value index measuring theperformance of the largest 1,000 U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of those Russell 1000® companies with higherprice-to-book ratios and higher forecasted growth values.
The Russell 2000® Index is composed of the 2000 smallest stocks in the Russell 3000® Index and is widely regarded in the industry as the premier measure of small-cap stock performance.
The Russell 2000® Value Index is an unmanaged, market-value weighted,value-oriented index comprised of small stocks that have relatively low priceto-book ratios and lower forecasted growth values.
The Russell 2000® Growth Index measures the performance of the Russell 2000® companies with higher price-to-book ratios and higher forecasted growth values.
The Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000® Index, which represent approximately 25% of the total market capitalization of the Russell 1000® Index.
The S&P 500 Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
U.S. Long Government Bond Index tracks the market for U.S. dollardenominated, fixed-rate, nominal U.S. Treasuries and U.S. agency debentures.
The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries excluding the United States.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Please go to msci.com for most current list of countries represented by the index.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). Please go to msci.com for the most current list of countries represented by the MSCI indices.
The Bloomberg Barclays Global Aggregate ex USD Index is a measure of investment grade debt from 24 local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Bonds issued in USD are excluded.
The Bloomberg Barclays U.S. Corporate High Yield Bond Index is a total return performance benchmark for USD-denominated, high yield, fixed-rate corporate bonds having a maximum quality rating of Ba1/BB+/BB+ or below, as determined by the middle of the Moody’s, Fitch, and S&P ratings.
The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.
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 Bond Index is an unmanaged index representative of publicly issued, SEC-registered U.S. corporate and specified foreign debentures and secured notes.
The Indices are unmanaged, are not available for investment and do not incur expenses.
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