The U.S. equity market advanced 9.3% during the quarter, earning 25.7% for the full year. Continued strong corporate earnings drove U.S. equities higher to start the quarter. Stocks retreated briefly at the end of November due to elevated inflation, an increasingly hawkish tone from the Fed, and concerns that the spread of the omicron variant could disrupt the economy. U.S. equities bounced back to end the quarter as easing fears regarding the severity of the omicron variant boosted investor sentiment amid an already strong holiday shopping season.
Large-cap stocks outperformed both the mid- and small-cap segments of the market in the quarter. All capitalization segments of the market posted strong returns for the full year, with large-cap stocks outperforming mid- and small-cap stocks by 6.1 and 13.9 percentage points, respectively. Growth stocks exceeded value stocks by 3.4 percentage points in the quarter. Strong relative performance from the technology sector, which accounts for over 45% of the growth segment of the market, was the primary driver of the growth segment’s outperformance in the period. For the one-year period, the growth and value segments performed in-line with each other.
The real estate sector posted the strongest return in the quarter (+14.9%) due to strong investor demand, particularly in the industrial sub-sector. The energy sector produced the largest return in the 1-year period after posting the weakest sector return in 2020. Rising demand for oil and natural gas drove energy prices higher in the year as economies around the world reopened from COVID restrictions.
International equities returned 1.8% during the quarter with developed market equities outperforming emerging market equities by 4.0 percentage points. Developed European equities advanced 5.7% in the period, despite volatile energy prices, tensions between Russia and Ukraine, and an increase in COVID-19 infections. Emerging markets equities declined 1.3% in the quarter and closed the year down 2.5%. Weak returns from China were the primary driver of the decline in both the quarter and year. China declined 6.1% in the quarter due to concerns regarding lockdowns because of the omicron variant.
Preliminary estimates from a subset of core real estate managers indicate a strong positive return for the quarter. Over the last year, industrial and multi-family properties have performed better than holdings within the office and retail segments of the market.
“Investing is laying out money now to get more The U.S. fixed income market was flat in the quarter and declined 1.5% for the year. At its last meeting, the Fed indicated it would increase the pace of its bond tapering, ending the program earlier than planned and setting the table for interest rate increases in 2022. During the quarter, investment grade credits returned 0.2% while non-investment grade corporate bonds rose 0.7%. U.S. Treasury Inflation Protected Securities (TIPS) returned 2.4%, which outperformed nominal treasuries in the quarter as inflation expectations increased. The breakeven inflation rate implied in 10-year TIPS ended the quarter at 2.56%, versus 2.37% at the end of the prior quarter. The realized annual Consumer Price Index (CPI) was 6.9% through November 2021. The annualized number remains elevated due to the impact of the economic lockdowns on prices during 2020 and the subsequent rebound in 2021, supply chain constraints, and a tight labor supply. Municipal bonds increased 0.7% in the quarter and 1.5% for the year on strong investor demand. Developed non-U.S. government bonds increased 0.2% in the quarter on a local currency basis but declined 1.8% for U.S. based investors due to the U.S. dollar strengthening. Emerging market bonds were down 0.4% in the quarter.