Markets climb despite uncertainty and volatility: reflections for fourth quarter 2021

In the fourth quarter of 2021, global stock markets largely advanced to close out the year firmly ahead, despite renewed economic uncertainty and market volatility stoked by the COVID-19 omicron variant. Inflation, and the Federal Reserve’s monetary policy outlook, also remained front and center for investors during an eventful quarter.

  • The U.S. labor market recovery proceeded during the fourth quarter, albeit at a slower pace. According to the U.S. Department of Labor (DOL), “The U.S. economy added a seasonally adjusted 210,000 jobs in November—the smallest gain since last December and a marked slowdown from an upwardly revised increase of 546,000 in October. Almost 600,000 people joined the workforce, and the unemployment rate fell to 4.2% from 4.6%.”1 The labor-force participation rate also rose to 61.8%, the highest level since the start of the pandemic. The increased participation may aid in easing recent labor market tightness.
  • The U.S. Bureau of Economic Analysis (BEA) released its most recent estimate of third quarter GDP. On December 22, the BEA stated, “Real gross domestic product (GDP) increased at an annual rate of 2.3% in the third quarter of 2021. In the second quarter, real GDP increased 6.7%.”2 The impact of the COVID-19 omicron variant on economic activity will be closely scrutinized in forthcoming quarters.
  • Inflation continued to be a hot topic. The DOL annouced that the consumer-price index, which measures what consumers pay for goods and services, increased 6.8% in November from a year ago. The core price index, which excludes the categories of food and energy, rose 4.9% in November from the prior year.3 Many economists point the finger at sustained imbalances in supply and demand as the economy recovers from the pandemic. Although it’s difficult to predict when these imbalances and resulting elevated inflation may moderate — as pointed out in our What inflation means for your investment portfolio letter — it is important to maintain a long-term mindset and recognize that higher inflation does not necessarily signal doom for stocks. In fact, historically over the long-term, stocks have proven to be a strong hedge against inflation.
  • In response to what it calls “inflation developments and the further improvement in the labor market,” the Federal Open Market Committee announced at its December meeting the intent to double the pace of balance sheet tapering to $30 billion per month — $20 billion per month of Treasury securities and $10 billion per month of mortgage-backed securities. In addition, Fed officials now expect three 0.25% increases in the federal funds rate next year.4

Fourth quarter returns

Fourth quarter returns 2021Returns shown in the chart above are for fourth quarter 2021.
Source: Morningstar®, data as of December 31, 2021. See disclosure page for more information.

  • Most equity markets advanced in the fourth quarter. Among stock segments, U.S. large-cap growth stocks were the top performers during the quarter, returning +11.6%. For the full 2021, however, S. small-cap value stocks led all asset classes, returning +28.3%.
  • In U.S. markets from a style perspective, large-cap value stocks, despite posting a +7.8% return for the quarter, trailed large-cap growth stocks, while small-cap value stocks outperformed small-cap growth stocks during the quarter. In 2021, large-cap growth stocks modestly outpaced large-cap value stocks, while small-cap value stocks considerably outperformed small-cap growth stocks.
  • Developed international and emerging markets trailed U.S. markets during the quarter and in 2021. A strengthening U.S. dollar relative to international currencies detracted from returns for U.S. investors in international markets.
  • Despite underperforming U.S. markets, developed international markets posted a strong 11.3% return in 2021. On the other hand, emerging markets finished the year in the red, posting a -2.5% return. As we touched on in last quarter’s reflections, returns in emerging markets have been weighed down by China amidst the Chinese government’s regulatory crackdown on the private sector.

World asset classes

Returns for the fourth quarter and 2021:

World asset classesSource: Morningstar®, data as of December 31, 2021. See disclosure for more information.

  • Similar to last quarter, investment-grade and below investment-grade fixed income sectors experienced mixed performance in the fourth quarter. Investment-grade bonds were largely flat, high-yield bonds posted positive returns and emerging-markets bonds modestly declined this quarter.
  • The U.S. treasury yield curve flattened during the quarter. Two-year treasury yields rose 0.45% over the course of the quarter, while 10-year treasury yields remained unchanged.5 As yields rose across almost the entire curve in 2021, the aggregate taxable investment-grade fixed income segment of the market experienced modestly negative performance for the year.
  • Municipal bonds outperformed their taxable counterparts during the quarter and year as demand for municipal bonds remained very strong.
  • U.S. high-yield credit spreads slightly narrowed during the fourth quarter. High-yield bonds outperformed investment-grade bonds during the quarter.6 In 2021, high yield bonds returned +4.6% and outpaced all other fixed income segments.

That sums up our market and economic highlights for the fourth quarter of 2021. While not everyone makes new year’s resolutions, it’s helpful to remember as we kick off 2022 that investing in a well-diversified portfolio tailored to your unique financial situation and risk tolerance, as well as staying disciplined in the face of uncertainty, are pillars to a successful long-term investing experience.


Markets climb despite uncertainty and volatility

U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Bloomberg Barclays Aggregate Index
Emerging Markets Bonds: JPM EMBI Global Diversified TR Index
Large Cap Value U.S. Stocks: Russell 1000 Value Index
Large Cap Growth U.S. Stocks: Russell 1000 Growth Index
Small Cap Value U.S. Stocks: Russell 2000 Value Index
Small Cap Growth U.S. Stocks: Russell 2000 Growth Index
Int-Term Municipal Bonds: BBgBarc Municipal 1-10Y Blend 1-12Y Index
High Yield U.S. Bonds: ICE BofA BB-B US CP HY Constrained Index 

Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.

Source: © [2019] Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Rafia Hasan

CFA, CFP® | Principal, Chief Investment Officer

Rafia Hasan, CFA, CFP®, is the Principal and Chief Investment Officer for Wipfli Financial Advisors, based in Chicago, IL. Rafia leads Wipfli Financial's Investment Committee and has a deep knowledge of the financial markets, specifically in the areas of alternative investments and private equity. She also specializes in personal financial planning and estate planning for women investors.

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Markets climb despite uncertainty and volatility: reflections for fourth quarter 2021

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