The year began on a promising note with low levels of inflation, low interest rates, and the anticipation of the vaccine rollout, which was going to put an end to the COVID-19 pandemic. What a difference a year can make! By the end of 2021, inflation was raging at around 7%, long term interest rates jumped up 0.50% and the emergence of the Omicron variant resulted in caseloads and hospitalizations at all-time highs. Persistent supply chain issues and gridlock in Washington could have resulted in a struggling stock market, but that’s not what happened. The US economy rebounded and equity markets ended the year in positive territory once again.

Most stock indices produced double digit returns in 2021, led by the S&P 500 Index up 28.7%. However, this performance was driven by a small group of stocks. The seven largest stocks in the S&P 500 Index averaged a return of more than 50% while the remaining 493 stocks averaged a 20% return.

By market capitalization, large cap stocks slightly outperformed small and mid-cap stocks, and by investment style, small and mid-cap value indices outperformed their growth counterparts. In fact, small cap value outperformed small cap growth by over 25% during the year, the largest calendar year outperformance since 2000.

At the sector level, all S&P sectors finished the year in positive territory with energy and real estate producing the highest returns at 54.6% and 42.5%, respectively.

Foreign developed markets finished the year in positive territory up 7.8%, as measured by the MSCI All Country World ex US Index; however, emerging markets continued to struggle with ongoing concerns around tempered growth in China, resulting in a decline of 2.5% for the year.

One would expect longer term interest rates to increase with high rates of inflation, strong economic growth, and increasing government debt, but strong demand for U.S. Treasuries has kept the 10-year yield range bound, ending at 1.51% at the end of the quarter. Most fixed income indices ended the year in negative territory.

While the US economy grew at 5.5% in 2021, growth continued to be hindered by supply-chain disruptions, labor shortages and new lockdowns as the Omicron variant began to spread across the globe. Real GDP rose 6.9% (annualized) in the fourth quarter, the fastest rate since 1984.

The US economy added 6.4 million jobs in 2021, more than any other time in history. This strong job growth led to the unemployment rate dropping from 6.7% at the beginning of the year to 3.9% by the end of 2021. Despite the progress that has been made, there are still 6.3 million workers that remain unemployed, and the labor force participation rate is well below pre-pandemic levels.

Inflation, as measured by the Consumer Price Index (CPI-U), grew at a pace of 7% in 2021, the highest level since 1982 when the price of a gallon of gas was $1.22. Inflation has been largely fueled by the increase in gasoline prices rising almost 50% over the past 12 months, used cars and trucks rising 37%, and food items, particularly meat, poultry, fish, and eggs rising on average 12.5%.

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