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2021 Year-End Review

2021: An Exceptional Year for the U.S. Equity Market

The broad U.S. equity market, represented by the Russell 3000 stock index, appreciated by 25.7% last year, it’s third-best calendar year in the last ten.  The three-year compound annualized return of 25.8% is also well above average. Many factors have contributed, including significant fiscal stimulus, low interest rates, and the success of the vaccines. Of some concern is that much of last year’s returns were driven by a small group of very large companies: Apple (up 36%), Microsoft (up 55%), and Alphabet, the parent of Google (up 67%). Many other stocks dropped.

The more established international equity markets, dominated by Europe, the U.K., Canada, and Japan, appreciated 11.3% while the emerging markets index, primarily from China, had a negative total return of 2.5%. Overall, equity markets outside of the U.S. remain undervalued.

Given All the Unsettling Events Last Year, One Would Have Expected More Volatility

2021 was not void of events that could have led to a market drop. In the U.S. we saw the Capitol attacked by a mob trying to overturn a legitimate election. On the other side of the globe, China’s largest property developer, Evergrande, was unable to complete apartments and defaulted on bond payments. A poorly executed withdrawal of U.S. forces from Afghanistan may have sown the seeds for future terrorist attacks. And Russia continues its threat to invade the Ukraine.

Fixed Income Markets Were Challenging as Expected

Interest rates rose slightly during the year, with the 10-year Treasury moving from .93% to 1.52%.  Since bond prices move in the opposite direction from rates, total returns were pushed down.  The broad bond market index lost 1.7% for the year.  HTG-managed fixed income portfolios experienced smaller losses, benefitting from shorter average maturities and more credit exposure than the index.

Inflation Returned as Consumers Increased Spending

Despite Covid-19’s continued ability to evolve, consumer spending increased faster than did the supply of goods and services. We all learned what a “supply chain” was and that our favorite restaurant remained short staffed despite 4% unemployment. This demand/supply imbalance pushed up prices. For the first time in decades, the Consumer Price Index (based on the goods and services of the average consumer excluding volatile food and energy) rose 5% year over year.

Diversified Equities Protect Against Inflation With Fixed Income Cushioning Risk

To protect purchasing power over time, exposure to equities is necessary even though significant short-term volatility may result. Maintaining the blend of both equities and fixed income provides short-term peace of mind while continuing to move you closer to achieving your long-term goals.

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