December 2021 capital markets outlook and risk metrics
Global markets generally posted positive returns in December, shaking-off Omicron variant and inflation concerns. In the US, the Fed indicated that tightening of policy may be brought forward with a more rapid reduction in asset purchases in 2022.
China’s equity market bucked the trend, posting negative returns due primarily to concerns about an economic slowdown linked to the real estate sector.
In the US, large cap stocks outperformed midcap and small cap stocks, and value stocks beat growth stocks. While large cap value and growth stocks performed similarly in 2021, smaller cap value substantially outperformed small growth stocks for the year.
Non-US developed markets rallied in December, with the EAFE modestly outperforming the S&P 500.
In spite of negative returns in China, the broad emerging markets index posted gains. EM value stocks outperformed growth stocks in December and for the calendar year.
The investment grade bond market produced negative returns in December, as inflation continued to weigh on nominal bond returns. However, TIPS and high yield bonds delivered positive returns.
REITs and infrastructure stocks delivered very strong returns in December.
After a difficult November, commodities returned to positive territory, offering support for natural resource stocks which posted strong returns.
US headline inflation climbed to a near 40-year high in November, as consumer prices rose 6.8% year-on-year, largely driven by higher energy costs, which rose 33%. Still, core inflation (ex-food and energy) rose 4.9% year-on-year.
In China, Evergrande officially defaulted on $300 billion in debt and its shares were suspended from trading in Hong Kong. Policy makers cut borrowing costs and urged local governments and state-owned companies to finish real estate projects started by Evergrande. Concerns regarding other real estate developers continue to mount as the government steps in to support growth.
While COVID continues to spread in developed and emerging markets, the Omicron variant has thus far proved to be less severe than the Delta variant, giving investors hope that recent travel bans and lockdowns might soon be rolled back.