Fourth Quarter 2021 Market Overview

by | Jan 7, 2022 | Investing, Quarterly Market Summary

2021 ultimately saw another good year for the markets, even if there were some bumps in the road. In the first half of the year, reopening economies, easy money policies and the distribution of the Covid vaccines seemed to fuel a furious market rally powered by more traditional stocks, especially in the small value space. The yield on the 10-year Treasury, an indicator of economic sentiment, began rising after reaching historic lows in 2020.

Then rising inflation, which was initially called transitory by the Fed, continued into the second half of the year. In November, inflation rose 6.8% year over year, surpassing estimates: it is the fastest rate of inflation in the US since 1982.[i] On top of that, the world contended with first the Delta variant and then the highly transmissible but apparently milder Omicron variant.

After a very encouraging first half of the year, the third quarter saw declines in most major indices other than the S&P 500 but returns for the fourth quarter were better. Differing recoveries and preparedness for the new variants meant that more developed countries and larger companies fared relatively well while emerging markets were more challenged. Despite the uncertainty in the world, most equity markets posted strong returns for the year.

US stocks once again led the way in the fourth quarter and for the year. The dominance of “Big Tech” meant that large cap stocks overall, especially large growth stocks, had strong returns, but small value stocks also performed very well, rising 28.3%.[ii]  Outside of the large tech names, growth stocks performed poorly, particularly small growth stocks.

International Developed stock returns were positive in the fourth quarter and for the year, but Emerging Markets were slightly negative for both periods.

Even with the dominance of “Big Tech,” value stocks did well in different parts of the market.  In the US, Small cap value stocks outpaced their growth counterparts by over 25%.[iii]  Emerging markets value stocks were positive for the year, while growth stocks were hindered by challenges such as the increased Chinese Government crackdown on their own large tech companies.

In fixed income, municipal bonds eked out a positive year even in a rising yield environment that challenged US investment grade bonds, which were slightly negative for the year. High yield bonds posted relatively strong returns behind an improving economic backdrop that saw many industries rebound. Emerging markets bonds, facing many of the hurdles affecting emerging markets stocks, fell the furthest out of the indices shown.

After a very strong first half of the year, challenges such as the new Covid-19 variants, rising inflation, and supply chain bottlenecks dominated headlines in the second half. Despite all the uncertainty these brought, markets were still generally positive, and stocks, except for emerging markets, posted returns that would look good, if not great, for any year. Rising yields, something that hurts bonds in the short-term, offers higher yielding bonds in the future, which will ultimately leave bond holders better off.  We did not see sharply rising rates in 2021, as the ten-year Treasury note yielded 1.52% to end the year, still low by historical standards, but with global economic recovery, inflation running hot, and the Fed turning hawkish we may well see rates rising soon.[iv]  Meanwhile, Covid-19 case counts have risen sharply but hospitalizations and deaths have not.  So far this Omicron variant seems milder, causing less severe illness than previous variants.[v] If that holds true, it is possible that no lockdown policies, or at least less stringent ones, will be enacted, allowing the economic recovery to continue into the new year.

[i] Cox, Jeff. 2022,

[ii] Source: Morningstar Direct. Data as of 12/31/2021.

[iii] Source: Morningstar Direct. Data as of 12/31/2021.

[iv] Source:

[v] Breuninger, Kevin. 2022,

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Index Descriptions

Dow Jones Industrial Average Index: measures the performance of 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.

Russell 3000 Index (U.S. Stock Market): measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. These securities are traded on the NYSE, NYSE MKT, and NASDAQ.

S&P 500 Index (Large Cap U.S. Stocks): measures the performance of large capitalization U.S. Stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, NYSE MKT, and NASDAQ. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value.

Russell 2000 Index (Small Cap U.S. Stocks): An unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index, representing approximately 10% of the total market capitalization of that index and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group owns the Russell Index data, including all applicable trademarks and copyrights.

Russell 2000 Value Index: measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

MSCI EAFE Index (International Developed Stocks): The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI Emerging Markets Index (Emerging Markets Stocks): is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 23 emerging countries around the world.

Bloomberg Barclays US Aggregate Bond Index (U.S. Bond Market or Investment Grade U.S. Bonds): includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.

Bloomberg Barclays Muni Bond Index 1-10 Yr Blend (1-12) (Int-Term Municipal Bonds or US Municipal Bonds): A market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index. The 1-10 Year Municipal Blend index tracks tax-exempt municipal General Obligation, Revenue, Insured, and Prerefunded bonds with a minimum $5 million par amount outstanding, issued as part of a transaction of at least $50 million, and with a remaining maturity from 1 up to (but not including) 12 years.

ICE BofA Merrill Lynch U.S. High Yield, BB-B Rated, Constrained Index (High Yield U.S. Bonds): Tracks the performance of US dollar-denominated below-investment-grade (BBB rated) corporate debt publicly issued in the US domestic market. Qualifying bonds are capitalization-weighted provided the total allocation to an individual issuer does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis.

JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds): The JP Morgan EMBI Global Diversified is a uniquely weighted index that tracks total returns for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. The index limits the weights of countries with larger debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.

JPM EMBI GD Index: J.P. Morgan Emerging Markets Bond Global Diversified Index (EMBI Global Diversified) tracks the returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi- sovereign entities: Brady bonds, loans, Eurobonds. The index limits the exposure of some of the larger countries.