as of December 31, 2021
Ongoing supply chain issues, the discovery of a new Covid-19 variant and the potential for monetary tightening weighed on the growth outlook during the fourth quarter. While shipping prices remain elevated, they are well below their peak levels of 2021, which should begin providing some price relief to both consumers and businesses. Fears that the Omicron variant would become a major headwind for economic growth are gradually fading as health outcomes do not appear to be as severe as with prior variants.
During the fourth quarter, inflation readings continued to move higher amid strong demand and ongoing supply chain difficulties. While inflation remains elevated, markets continue to price in future inflation near the Federal Reserve’s target. Monetary policy is becoming less accommodative, but policy rates remain near zero in the developed world. During the quarter, the Federal Reserve announced a doubling of its tapering pace. With a fair amount of monetary tightening priced in for 2022, the Fed and other central banks should have room to maneuver without triggering a meaningful market reaction. Our expectation is that inflation will peak and begin to stabilize this year, even if it is above 2019 levels, which should allow the Fed to proceed on its current course.
Global equities posted strong returns during the quarter, with the MSCI ACWI index, a measure of global equities, gaining 6.7% and finishing the year with an 18.5% gain. The S&P 500 index returned 11.0% during the quarter, outpacing most other regions. The S&P 500 index returned 28.7% in 2021. International developed stocks gained 2.7% and finished the year with an 11.3% gain. A stronger dollar detracted 1.2% from US dollar returns during the quarter. Emerging market equities fell 1.3% and finished the year down 2.5%. Latin American and Asian markets drove the losses for the calendar year.
Within fixed income, the Bloomberg Barclays Aggregate was flat during in the fourth quarter, with similar performance for Treasuries and corporate bonds. The yield curve flattened during the quarter, with 2-year yields rising 45 basis points, while 30-year yields fell by 18 basis points. 10-year yields were unchanged. REITs posted strong results during Q4, outperforming broader equity markets.
Overall, many of the short-term headwinds that impacted markets over the quarter are showing signs of improvement. While we expect the economic recovery to continue and maintain an optimistic view toward equities, elevated valuations leave little cushion for downside surprises. Political risks had limited market impact during the quarter, but any unexpected developments could lead to volatility and
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