The fourth quarter began in the shadow of September’s selloff, which was the most extended shakeout of 2021. That didn’t stop stocks from making a run toward record highs, even as a combination of challenges ensured a choppy climb to finish the year.
Looking ahead, we expect ultra-low interest rates and higher inflation growth to force central banks to adopt more aggressive policies, pushing rates higher. Rising rates shouldn’t be equated with an end to the bull market in equities. Rather, we believe they could serve to foster a shift away from the most expensive, interest-rate-sensitive areas of the market. This could benefit a broader grouping of more attractively valued stocks.
Watch Kevin's overview
Hi, I'm Kevin Barr, Head of SEI's Investment Management Unit. Over the next few minutes, I'll provide an overview of the global financial markets and our perspective on them.
The fourth quarter began in the shadow of September sell off, which was the most extended shakeout of 2021. That didn't stop stocks from making a run towards record highs. Equities recovered in October and raced higher through mid-November. Unrestrained inflation, tightening central bank policy, and the emergence of the Omicron variant, combined for a choppy climb to finish the year.
At the closing bell, U.S equities were the top performing major market for the fourth quarter and for the full year.
Developed markets, handily outpaced emerging markets for the most of 2021, and the fourth quarter continued the trend. China's regulatory reforms in heavy debt and its real estate sector, humbled the country's equity market in 2021. Brazil, meanwhile, battled high inflation with a series of rate hikes by its Central Bank.
Yield curves flattened around the world during the fourth quarter. Shorter-term government bond rates climbed alongside the increasing likelihood of tighter central bank policy. Long-term rates declined on the expectation that this would diminish prospects for future growth. Within fixed income sectors, fourth quarter performance mirrored the full year.
Inflation-indexed bonds set the pace followed by high yield. Other sectors were mixed mildly negative, given the impact of rising interest rates. Global bonds were pushed down as the U.S Dollar sustained a relentless climb in 2021. Local currency, emerging market debt had the steepest losses for the quarter and the year.
Although there have been pockets of speculative behavior in some of the areas of the financial market, we don't see signs of a serious correction on the horizon. Earnings growth in 2021 for developed and emerging market equities both exceeded their earnings gain for the U.S. As a consequence, the relative valuation of international markets has become even more attractive. While the trajectory of the S&P 500 earnings growth is likely to slow next year, we have a positive outlook on equity markets. We expect ultra-low interest rates and higher inflation growth to force central banks to adopt more aggressive policies, pushing interest rates higher. Rising rates shouldn't be equated with an end to the bull market in equities. Rather, we believe they could serve to foster a shift away from the most expensive interest rate sensitive areas of the market. This could benefit a broader grouping of more attractively priced value stocks.
On behalf of everyone at SEI, thank you as always for your trust and confidence.
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