Despite the ongoing pandemic, most global markets had a positive year in 2021. Only a few markets, including China, were down for the year, with US stocks returning nearly 29% and ending the year less than 1% off a record high. Despite inflation reaching multi-decade highs, equity performance was bolstered by a strong rebound in economic growth and maintained supportive fiscal and monetary policy.
Investors repeatedly dismissed news that may have derailed equities in previous years. Despite a contested presidential election, record-high inflation, supply chain problems, and sceptics who predicted a downturn that never materialised, equities reached new highs. Not even the global Covid-19 pandemic or its Delta and Omicron forms created a downturn. In fact, in 2021, the S&P 500 reached 70 all-time highs, second only to 1995.
Even though speculative frenzy had faded and market dynamics evolved, investors had reason to stay confident due to the strong economic recovery. The labour market recovery has been particularly notable, as the US added 18.5 million nonfarm jobs since April 2020 and the number of people filing for unemployment claims reached a 52-year low.
The stock market tale in 2021 would be incomplete without discussing the Federal Reserve. What made 2021 so strong was the economic recovery from a macro perspective and a really strong push from a policy perspective. The FED held interest rates near zero throughout the year and continued to pump billions of dollars into markets each month, encouraging investors to seek out higher-returning assets like stocks and contributing to increased inflation.
Investors, on the other hand, understand the Fed's support will eventually run out. For much of 2021, the big question on Wall Street was when that will happen. The Federal Reserve has stated that it will terminate its monthly bond-buying programme by March 2022, and policymakers have stated that they intend to raise the fed funds rate at least three times in the coming year to keep inflation under control.