Global equity markets surged in 2021 on the back of unprecedented monetary and fiscal stimulus, strong economic activity and burgeoning corporate earnings. Not even the headwinds of soaring inflation, new COVID variants and a recent hawkish tilt by the US Federal Reserve and other central banks around the globe could dampen the exuberance in the final days of December 2021.
Australian employment data provided continued to improve throughout 2021. The unemployment rate came in at 4.6% in November, with 366,100 new jobs added, well above market expectations. The employment report was a real bright spot, with 128,300 full-time jobs and the participation rate lifted back toward pre-COVID levels at 66.1%. Australia has been one of the best-performing nations regarding economic recovery but hit a speed bump in the third quarter of 2021 with renewed lockdowns caused by the Delta variant.In 2021 on a total-return basis, the S&P 500 was the standout gaining +28.8%, the tech-heavy Nasdaq 100 +27.6%, Nasdaq Comp +22.3%, the Dow Jones Industrial +21.0%, and the small-cap Russell 2000 index lifted +15.2%. The ASX 200 posted a +15.92% gain (all quoted in local currency terms). Since the global financial crisis lows in 2009, 2021 was the second time in the last 13 years where the S&P 500 has outperformed the Nasdaq 100. Given the Nasdaq 100 outperformed the S&P 500 in 2020 by +31%, it held up relatively well.
The Russell 2000 only gained modestly in 2021, but the small-cap index owns the best returns since the COVID pandemic lows. From the low point in equity markets in March 2020, the Russell 2000 Index has gained over +156%. For comparison, the Nasdaq 100 gained +149%, S&P 500 +120%, Dow Jones Industrial Average +104% in the same timeframe.
December 2021 Summary
- Global equity markets gained in 2021 on the back of unprecedented monetary and fiscal stimulus
- US equity indices enjoyed solid gains for the third straight year
- All of the 11 sectors in US equity markets posted double-digit returns for the first since records began in 2001
- Growth outperformed Value for the fifth consecutive year
- Inflation is rising at the fastest pace in 40 years
- The Bloomberg Commodity Index gained over +27% for the year
- The US Fed commenced tapering of their QE program, and three interest rate hikes are expected in 2022
Equity Market Sectors
According to Bloomberg data dating back to 2001, it's the first time all eleven of the equity market sectors have achieved double-digit annual returns. The top-performing sectors being Energy +54.5%, REITs +45.9%, Financials +35.0%, and Technology +34.4%. Surging oil prices benefited the energy sector with strong demand for petroleum around the globe. High yielding real estate investment trusts (REITs) reaped the rewards of ultra-low interest rates and strong demand for rental properties and warehouse space.
M&A Activity
Large-cap financial institutions with exposure to capital markets gained in 2021 from the record merger and acquisition (M&A) and initial public offering (IPO) activity. Global M&A deals surpassed $5 trillion for the first time ever, beating the previous high of $4.4 trillion in 2007. Deal volumes in the US almost doubled on the previous year to $2.6 trillion, and private equity deals set a record at nearly $1 trillion. We saw a record 1032 IPOs in the US, a 5x increase on the yearly average of the previous decade.
Inflationary Pressures
Inflation came back with a vengeance last year, with the COVID pandemic and preceding policy responses having a profound impact on demand, supply and labour around the globe. The manufacturing shutdowns seen in 2020 damaged the global supply chains across multiple sectors whilst also shifting demand away from services and towards goods. We saw $6.6 trillion in fiscal spending in the US, as the Federal Reserve provided wide-ranging support to financial markets, including the zero interest rate policy (ZIRP) and quantitative easing (QE). The November reading of the consumer price index (CPI) showed a +6.8% gain in the previous 12 months, the fastest increase in 40 years.
Commodities
WTI Crude Oil gained +55.3% in 2021, while gasoline prices lifted +58.1%. Coffee added +76.2%, Lumber +58.1%, Natural Gas +46.0%, Cotton +43%, Aluminium +41.1%, Copper 28.6% and Wheat +21.2%. Precious metals including Gold and Silver were the laggards in the sector, declining -4.3% and -11.9%, respectively. The Bloomberg Commodity Index (BCOM) gained over +27% for the year, which is the largest annual gain since 1979, adding to the global inflationary pressures.
US Federal Reserve
At the November 3rd meeting, the US Federal Reserve shifted its stance towards more hawkish policy settings by announcing it will begin tapering the asset purchase program by $15 billion per month. By the December meeting, they reduced purchases further by $30 billion per month, which means the program will finish by March at the current rate of reduction. The term 'transitory inflation' was retired from the Fed's monthly statement, and interest rate futures began pricing up to three rate increases this year.
Looking Ahead
Equity markets pushed to new highs in the final days of the year, which might suggest investors are not expecting ongoing shutdowns related to the Omicron COVID variant and lockdowns to begin easing soon. Corporate earnings have remained strong, showing it is possible to navigate the supply chain issues and inflationary pressures seen in recent months. Historically for equity markets, weak performance tends to self-perpetuate, and the same is true for strong performance. Just because we have seen three consecutive positive years does not imply we will soon see a trend reversal. The path of least resistance remains higher for equity markets at this point in time.