Economic and Market Review 2021

After one of the most difficult years in decades, 2021 may have been one of the most eagerly anticipated years in recent memory. Emerging from 2020, a year marked by quarantines, lockdowns, cancellations, and economic shutdowns, the entire world longed for a return to some semblance of normalcy. Investors were cautiously hopeful global economies would be strong enough to shake off the COVID-19 pandemic that halted economic growth in 2020 and made investing in equity markets a wildly volatile ride. 

2021 illustrated, once again, the difficulty of making tactical financial and investing decisions based on predictions and anticipation of which direction markets would head. The global economy quickly rebounded from the widespread lockdowns that left it gasping and sputtering in 2020. The development and distribution of effective vaccines led to the easing of lockdowns and led to an economic expansion much stronger than most anticipated.

The economic recovery had its own issues to contend with, however. Snarled supply chains and backlogged shipping ports led to severe shortages of goods throughout the year. Labor shortages were felt across multiple industries and contributed to supply shortages in the manufacturing sector and curtailed operations and closures in many service industries. 

Long Anticipated Inflation Finally Appears

Supply chains and labor shortages proved challenging enough, but runaway inflation dominated most of the news headlines in 2021. The US economy saw an inflation rate not seen in four decades when the consumer price index (CPI) jumped 6.81% from a year earlier. As inflation picked up in the spring and into the summer months, many media outlets and economists debated and speculated whether the sharp run-up in prices was transitory or likely longer lasting while the White House vehemently insisted inflation would be short-lived. As the months turned colder however, Federal Reserve Chairman Jerome Powell reluctantly admitted that higher prices were likely to continue for the foreseeable future and he subsequently called for interest rate hikes in 2022 to help tame inflation. Inflationary pressures were not felt equally across all segments of the economy, and some consumer products and services were hit much harder than others by high inflation. Energy prices rose significantly higher than many other segments of the economy because of constrained production on the supply side and skyrocketing consumer demand with the elimination of economic lockdowns. In 2021, the cost of gasoline rose 51% from 2020, while natural gas bills increased 28% according to the US Bureau of Labor Statistics. Consumers also felt their wallets pinched at the supermarket. According to the US Department of Agriculture, the cost of meat, poultry, fish and eggs increased by 12.8% in 2021, while the overall cost of food spiked 6.3%. Inflation threatens to change consumer shopping behavior as the price of beef spiked 24% at the grocer in 2021, forcing many consumers to consider less costly meat options. Durable goods also saw large price spikes. The cost of new vehicles, when they could be found, increased 9.8% in 2021. Because of supply shortages and higher demand for vehicles, the price of used vehicles sharply rose by 26% in 2021. In a surprise, the cost of medical care only grew by 1.7% in 2021 despite being a budget item that increases well above the annual rate of inflation, historically.

Markets Return in 2021

Equity markets performed exceptionally well in 2021, despite some of the economic headwinds mentioned earlier. US large cap stocks led the way for all investment asset classes, ending 2021 near record highs with a 28.71% gain in the S&P 500 index. Driven in large part by tech stocks, the S&P 500 index notched 75 closing records in 2021 on a total return basis!

Global equities also had a strong year.  As measured by the MSCI All Country World Index, global equities increased 18.54%. Developed nation international stocks rose 12.62%, represented by the MSCI World ex USA Index. Emerging markets were the only equity asset class that struggled in 2021, as the MSCI Emerging Markets Index fell -2.54% overall.

Fixed income markets, on the other hand, experienced listless returns in 2021. The Barclays Global Aggregate Index lost 4.71% in 2021, its worst year since 1999. Bond markets in the United States did not fare much better. The Morningstar US Core Bond Index finished 2021 down 1.6%, experiencing its worst year since 2013. Corporate bonds performed slightly better than Treasury bonds, with the Morningstar US Corporate Bond Index losing 1.1% in 2021 compared to a -2.3% decline for the Morningstar US Treasury Bond Index. Not every fixed income index experienced a loss in 2021. The Morningstar US High Yield Bond Index gained 5.2% in 2021, while the Morningstar US TIPS Index earned 5.7% in 2021.

Lesson for Investors

A review of 2021 provides a valuable reminder of some important investing lessons. Investment markets are forward-looking and short-term market movements are impossible to predict. It stands to reason then that investors are unable to anticipate the onset of the next financial crisis, nor can they predict the end of existing ones. But we know investors do not have to make predictions to prosper. By trusting efficient investment markets and embracing diversification, disciplined investors reap the rewards that markets and their long-term focus offer.

Sources:  Dimensional Fund Investors, Wall Street Journal, US Department of Agriculture, US Bureau of Labor Statistic