The theme from the early parts of 2021 persisted into Q4 with broad capital markets continuing to set all-time highs in the face of a persisting global pandemic, higher inflation, supply chain disruptions, and pockets of political gridlock. Most thought leaders attribute this to the “re-opening” mindset and the fact that the economy is learning and adapting to the new reality of operating within the global pandemic. Continuing fiscal support and an accommodative Fed (again, despite some hawkish rumblings) with interest rates staying within a narrow trading range completed the picture to support higher stock prices.
However, all is not rosy! The broad capital markets like the S&P 500 continued to surge during Q4 and for all of 2021, but the strength was not universal. Diversifying asset classes like U.S. small and mid-cap equities and emerging market and international developed equities lagged; some by a wide margin. Core bonds continued their mathematical journey to “Nothingsville” as historically low yields continued to produce low total returns. [For clients who can tolerate more risk, D&A continues to underweight bonds by up to 10% of target.]
Per the table below, the S&P 500 (IVV) has been on a tear with 2020 and 2021 annual total returns of 18.40% and 28.66%, respectively, easily beating every other major asset class over the last two years. Other major asset classes like small- and mid-cap equity (SCHA and SCHM) produced strong returns in 2021 of 16.35% and 19.33% but was a drag on total portfolio performance. Emerging market equities (SCHE) were a disappointment in 2021 with a -0.72% return. Finally, not unexpectedly, core bonds lagged with a total return of -1.74% in 2021.
The array of disparate quarterly returns in the table above once again highlights the difficulty in predicting capital market returns. From my blog post Are you Spooked? on October 27, 2021:
As readers of this blog well know, no one can call the market and our view is that a long-term strategic investment strategy developed to achieve your goals is the best approach. If you have a long time horizon and income/net worth sufficient to support your needs and wants, stay in the market and wait it out. If not, we can develop a strategy that recognizes the risks and positions you for a high probability of success.