Monthly Market Update: December 2021

As for the year that was, the S&P 500 was up 4.36% in December, bringing its 2021 return to 26.89%. Despite the gains, many investors held their breath over the last 12 months given new Covid variants, increasing inflation, and wild volatility surrounding “meme” stocks and cryptocurrencies. 

In November, the US Consumer Price Index (CPI) jumped to 6.8% year-over-year, its highest reading in 39 years, and the unemployment rate fell to 4.2%. A friendly Fed did support the economy throughout the year keeping rates near zero, however, bond buying support is expected to end in March 2022 on the back of current market conditions, and the first rate rise is anticipated for June 2022. In saying this, if the three expected increases to rates do come to fruition over the next year, rates overall would still be low and supportive of the market, but if inflation pressures don’t ease simultaneously then market performance will be less certain.

Supply and labor shortages continued to be an issue in December as supply chains remained broken, and in some cases even more broken than previous months. As the Omicron variant began to land on various shores, more and more workers were forced into isolation as infection rates climbed to never before seen levels. These conditions caused fixed income performance to remain flat over the quarter, yet optimism prevailed and equity markets continued their run. 

Within fixed income, high-yield bonds and loans generated strong positive returns while Treasuries and investment grade corporates declined. The month started off weaker in high-yield bonds, with new issues weighing on the market, but after new issuance stopped in advance of the holidays, and after early data indicated that the Omicron variant of Covid-19 was less lethal than previous variants, investor fear subsided and spreads tightened meaningfully. 2021 saw significant investment grade issuance with companies pulling forward their financing plans given potential rate hikes in 2022. 

Asset class commentary

Residential real estate 

Across most of the country’s housing markets, 2021 recorded never before seen numbers. According to real estate company Redfin, the median U.S. sale price reached $386,000 in June, a 24 percent jump from the same time the previous year, and the highest on record. Renewed confidence is having an outsized effect on luxury sales, which for years had lagged the rest of the market. Through the third week of December, there were 1,877 contracts signed at or above $4 million, almost three times as many as in 2020 and the most since at least 2006.

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