Fourth Quarter Market Summary
Equity returns were very strong for the final quarter of 2021. US stocks marched about 11% higher even as fears over rising cases of the Omicron variant and how quickly the Fed will begin asset tapering weighed on investors. The economy is continuing to recover as the unemployment rate fell to 4.2% and labor participation rose, but we are still about 1.5 percentage points below pre-covid levels.
International stocks returned 2.8%, continuing their underperformance relative to the US. Emerging markets performed the worst, losing 1.3% for the quarter. China was exceptionally bad, losing over 6% for the quarter and down 21.7% for the year. Developed international stocks fared much better, up 2.7% for the quarter.
The 10-year Treasury ended the quarter almost exactly where it started with a yield of 1.5%. This was somewhat surprising given the Fed announced plans to taper its asset purchases and raise rates in 2022.
Below is a table highlighting various market index returns over the past 3, 12, and 36 months:
As the year begins, the talking heads and investment prognosticators like to release their “expert” predictions. The truth is that they don’t have any idea more than anyone else. For job security and to get on financial news networks, they can’t say “I have no idea where this market is going”.
So, what can an investor do in this environment? You can review your asset allocation, revisit your long-term goals, review what happened last year, make reasonable assumptions based of historical evidence, and remember that you can’t time the market.
As we begin 2022, it is easy for investors to feel like there is no way that stocks can go higher. However, many of these same sentiments were present at the start of 2021 after markets ended the year up double digits in 2020.
The fact is, there is always a reason to sell if you look for one. It’s important to remember markets are resilient as the chart above illustrates. Bad news makes for a great headline to get you to tune in so that networks can sell advertising, but oftentimes leads to poor investment decisions.
There are multiple products now available that attempt to give investors exposure to cryptocurrency. None of which, track the spot price very well. BITO was launched in October, aiming to provide exposure to Bitcoin Futures, and has garnered about $1 billion in assets. Time will tell how well it tracks the performance of Bitcoin itself, but other futures-link ETFs have often had a difficult time keeping tracking error low.
In addition, there is the Grayscale Bitcoin Trust (GBTC) which has assets of about $27 billion. The goal again is to track the price of Bitcoin. Below you can see the previous 1-year return of the Bitcoin Reference price (blue) vs GBTC (green). It has done a very poor job tracking the exposure of actual Bitcoin, lagging by 48 percentage points.
As the asset class continues to mature, we expect to see other product launches that will do a better job of getting investors exposure to the underlying asset. We will be on the look-out for such investment vehicles.
We saw prices of goods soar in 2021. Shortages of input materials, from computer chips to labor, were often cited as the main cause for the price increase. With many people working from home and looking for socially distant recreation areas, we saw the price of furniture skyrocket!
Recently, the federal government announced that it was raising its starting minimum wage to $15 per hour in accordance with President Biden's Executive order. Many states already had plans to raise the minimum wage to $15 an hour. The wage hikes are likely here to stay, while other price increases could prove to be transitory. Housing supply continues to be low, even as builders continue to construct new homes (consider it takes about 6 months to build a home). There continues to be a lack of semiconductors as well as shipping containers to ship goods. As the bottlenecks work through the system and the supply chain gets back to “normal”, the hope is not all the price increases will persist.
I’m sure you’ve heard Phil and me say it before, “we have no idea where the market is headed in the short-term,” no one does. We’re confident, as history has proven, that equities will rise in the long-term and investors should control risk to take advantage of the inevitable ups and downs.
JR Geld, CFA, CFP®
Philip E. Huber, Jr, CPA, CFP®
HWA Financial Group
3448 Ellicott Center Dr.
Ellicott City, MD 21043
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