Overall, 2021 has been a good year for investors, with the S&P 500 in particular soaring by more than 20% year to date, which is impressive even if you strip out todays elevated levels of inflation. Other markets have done less well but have still delivered what in most years would be considered good performance. Here in the UK the FTSE 100 is up by 11%, while the Euro Stoxx is around 16% higher. Asia has certainly lagged this year, as in Japan the Nikkei is only up by nearly 4%, while China and emerging markets have certainly disappointed, being 13% and 3% lower respectively.
2021 has built on an already impressive recovery from the pandemic lows of March 2020, which when measured against previous post-recession recoveries, this is right up there with the best. Shares in developed markets have done well, so too have commodities and property. Both of these asset classes are traditional beneficiaries in an inflationary environment, and this is where the market ties in with the years biggest story of inflation, and how this and central banks has the potential to derail the market rally.
The other key driver for markets this year has been earnings. It has been another great year for corporates, as economies have reopened after the lockdowns from March 2020 to April of this year. US earnings were 48% higher – clearly not a sustainable rate of growth, but an excellent recovery that has underpinned the stockmarket rally and kept valuations ay a reasonable level. Earnings explain the geographical difference in performance too as US earnings have been much more impressive than other parts of the world, notably those in emerging markets and China. The great performance of stockmarkets has also been reflected in investment fund flows – after lagging behind cash and bonds in the early stages of the pandemic, equity flows have now more than caught up these asset classes over the last 18 months.
The more worrying theme of the past year has been the return of inflation, with last weeks 6.8% reading in the US and 5.1% in the UK the most obvious sign of a deepening problem for central banks, albeit one caused as much by supply issues as an overheating economy. There are signs of the economy running hot with unemployment falling to historically very low levels, but the main driver of inflation appears to be supply chain issues. The big question as we approach the end of the year is how central banks are going to withdraw from a period of extremely accommodative monetary policy, as interest rates have been kept at extremely low levels in the wake of the rising inflation.