Following increased volatility in the third quarter, the last quarter of 2021 brought an unnerving amount of optimism in the markets especially considering sky-high inflation readings, a hawkish Fed announcing moves to eliminate easy monetary policy from the past 10+ years, and concerns over the Omicron COVID-19 variant surge. Virtually all sectors ended the year strong during the fourth quarter of 2021 and benefitted from a December “Santa Claus rally” once again. The S&P 500 Index rose 10.65% during the fourth quarter to end the year up 26.89%. The tech-heavy NASDAQ closed out the year with an 8.28% gain for the quarter, almost all of which occurred in the month of October. In contrast to other indices, the NASDAQ squeezed out a mere 0.69% return in December. Furthermore, as we write this commentary, it is clear that was just the beginning of relative underperformance in the technology sector that would continue into the early weeks of 2022. The Dow Jones Industrial Average ended the fourth quarter up 7.37% and 18.73% for the entire year.
Following the trend seen during the second and third quarters of 2021, investors continued to rotate out of smaller capitalization companies and into large and mega-cap stocks during the quarter.
The Russell 2000 Index, which includes 2000 of the smallest companies in the market, rose only 1.86% during the fourth quarter which was the worst equity performer of the indices in the table above. Value-based investing, which focuses on buying companies that exhibit quality fundamentals but appear to be undervalued, exhibited better returns even for the smaller capitalization companies. The Russell 3000 Value Index gained 7.01% for the quarter, and even the Russell 2000 Value Index gained 3.90% for the quarter.
As discussed in the past two quarters, mega-cap growth and technology stocks (like Facebook, Amazon, Apple, Netflix, and Google) still had some upside in the fourth quarter, however, they are more overvalued and primed for a correction than other market sectors. Again, that correction appears to have started during the first weeks of 2022. We still feel that cyclical and value assets should continue to outperform on a relative basis throughout the ongoing recovery and reopening from the pandemic.
The Bloomberg Barclays US Aggregate Index, which includes a broad cross-section of U.S. fixed-income assets overall, was basically flat at 0.01% for Q4 and remained down -1.54% for the year. Shorter-term yields, which move in the opposite direction of bond prices, continued to climb this quarter as expectations about inflation and monetary policy changes sent ripples of anxiety through the market.
Inflation Will Call the Market Tune for 2022
Inflation is a much more embedded problem than the Fed and politicians have been indicating. Shifts in the social system driving redistribution politics, the Fed’s easy monetary policy, and a pandemic have collided together to drive a very dangerous wave of wage and price inflation into the economic system. We have not seen this type of inflation set up since the 1970’s Stagflation crippled the U.S. economy.
Unless otherwise indicated, the source for all price and index data used in charts, tables and commentary is Bloomberg.
IMPORTANT INFORMATION
Past performance does not guarantee future results.
The views presented are those of Steven Van Solkema and Don Schreiber, Jr. and should not be construed as personalized investment advice or a solicitation to purchase or sell securities referenced in the Market Commentary. All economic and performance information is historical and not indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referred to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI Investments or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with WBI Investments or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but WBI Investments does not guarantee its reliability. Sources for price and index information: Bloomberg (unless otherwise indicated). WBI Investments pays a subscription fee for the use of this and other investment and research tools. WBI Investments and Bloomberg are not affiliated companies.
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WBI managed accounts may own assets and follow investment strategies which cause them to differ materially from the composition and performance of the indices or benchmarks shown on performance or other reports. Because the strategies used in the accounts or portfolios involve active management of a potentially wide range of assets, no widely recognized benchmark is likely to be representative of the performance of any managed account. Widely known indices and/or market indices are shown simply as a reference to familiar investment benchmarks, not because they are, or are likely to become, representative of past or expected managed account performance. Additional risk is associated with international investing, such as currency fluctuation, political and economic uncertainty.
- Annualized Rate of Return is the return on an investment over a period other than one year (such as one quarter or two years) multiplied or divided to give a comparable one-year return.
- The Dow Jones Industrial Average (DJIA or “The Dow”) is a price-weighted average of 30 of the largest and most significant blue-chip U.S. companies.
- The S&P 500 Index is a float-market-cap-weighted average of 500 large-cap U.S. companies in all major sectors.
- The NASDAQ Composite Index (NASDAQ) is a market-value weighted index of all common stocks listed on NASDAQ.
- The Russell 3000 Index is a float-adjusted market-cap weighted index that includes 3,000 stocks and covers 98% of the U.S. equity investable universe.
- The Russell 1000 Index is a float-adjusted market-cap weighted index that includes the largest 1,000 stocks by market-cap of the Russell 3000 Index.
- The Russell 2000 Index is a float-adjusted market-cap weighted index that includes the smallest 2,000 stocks by market-cap of the Russell 3000 Index.
- The Russell 3000 Value Index uses the value characteristic book-to-price ratio to create a style index based upon the Russell 3000.
- The Russell 1000 Value Index uses the value characteristic book-to-price ratio to create a style index based upon the Russell 1000.
- The Russell 2000 Value Index uses the value characteristic book-to-price ratio to create a style index based upon the Russell 2000.
- The Barclays U.S. Aggregate TR Index is calculated based on the U.S. dollar denominated, investment grade fixed-rate taxable bond market including treasury, government-related, corporate, MBS, ABS and CMBS debt, and includes the performance effect of income earned by securities in the index.
- The Barclays Global Aggregate TR Index is calculated based on global investment grade debt from twenty-four local currency markets including treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers and includes the performance effect of income earned by securities in the index.
