Equity Overview

All sectors rose in December except consumer stocks, which were flat.  Value stocks outperformed growth stocks at all capitalization levels.  Markets were volatile, as the S&P 500 moved by 1% or more on 10 of 23 trading days.

For the full year 2021, an underlying theme in equities was a dramatic reversal in the performance of growth stocks versus value stocks.  In 2020, growth stocks outperformed value stocks by 30% to 2%. But in 2021 mid-cap growth stocks gained only 12% while mid-cap value stocks gained 26%.  And small-cap growth stocks gained a mere 2% while small-cap value stocks gained 26%.

Macro Overview

2021 was a year of recovery.  The U.S. economy enjoyed an impressive rebound as GDP grew at annualized rates of 6.4% in the first quarter, 6.7% in the second quarter, and 2.3% in the third quarter.  Unemployment dropped from 6.3% in January to 4.2% in November.  Initial jobless claims dropped to a 50-year low in December.  Employers added jobs in every month, highlighted by a 1.1-million increase in July alone.  Consumer spending rose throughout the year, particularly in the first half when it was boosted by government stimulus checks.  Consumer confidence fluctuated but finished the year at 115.8, up from 87.1 in January.

The unwelcome guest at the party was inflation.  Increases in the Consumer Price Index gained steam throughout the year, culminating in November with a year-over year gain of 6.8%–the highest rate since 1982.  For most of the year the Federal Reserve described this phenomenon as “transitory” and kept its supportive monetary policy intact, maintaining interest rates near zero and continuing its quantitative easing.  But by November, the Fed acknowledged that inflation was a longer-term problem.  It reversed course, and in December made clear that its accommodative policy was finished.  Now it appears that quantitative easing will end by April and there will be at least three interest rate increases in 2022.

Less clear is the course of the COVID pandemic.  Hopes that it might be subsiding were dashed with the arrival of the Omicron variant in November.  The variant remains active throughout the U.S., but with uneven impact.  Some areas have experienced an unprecedented volume of cases and hospitalizations, while other areas have seen declining numbers.  Current projections, based in part on the timeline in other countries, look for Omicron to peak in late February or early March.  Should that occur, perhaps we can look forward to a “Return to Normalcy” like the one a century ago, after the pandemic of 1918-20.