- 2021 ended much like it began, with rising levels of COVID cases across the country.
- Vaccine rollout and economic reopening led to a rebound in the labor market
- Housing market boom
- Unprecedented spike in demand for goods, disrupts world supply chains and contributes to inflation
- Equity markets continued reaching new highs as the bond market began the year with a sell-off, then leveled off as Delta and Omicron worries emerged
- Real Assets had a strong year as the boom in consumer demand increased upward pressure on a wide range of assets, such as commodities
Labor Market Rebound
With the onset of COVID in early 2020, accompanied by nationwide lockdowns, the labor market took one of the most significant hits in decades. As we entered 2021 with the rollout of vaccines and gradual reopening of society, the labor market had one of the quickest rebounds in history. The unemployment rate started off the year at 6.4% and had declined to 3.9%, along with an increasing labor participation rate both overall (61.4% to 61.9%) and among working age (25-54) individuals (79.9% in April 2020 to 81.9% in December 2021). As cultural attitude toward work has become more selective with the increase of remote work flexibility and fiscal cushion provided by the government, people are changing jobs at previously unseen rates, with the “U.S. Quits Rate” rising from 2.3% in the beginning of the year to 2.9% in December.
Housing Market Boom
Historically low mortgage rates combined with the dramatic shift to working from home (and the flexibility associated with that) led many to look for more spacious living accommodations. The growth in supply was not fast enough to meet demand resulting in a surge in many facets of the housing market that have not been seen since before the Great Financial Crisis. Existing home sales hit 6.1 Million, levels outside of last year, not seen since prior to the Great Financial Crisis. The average price of these homes up 15% to $354,300.
Supply Chain Breakdown and Inflation
The stress that a resurgent consumer can place on just-in-time inventory management came into full view halfway through the year, when it became apparent that supply chain logistics could not manage increased demand, leading to ships queueing outside major U.S. ports waiting to unload. Tied to this was increasing evidence that elements of this inflation were going to be more permanent than transitory. The year started off with inflation at 1.4%, at the time below the Fed’s 2.0% target, inflation then ended the year at 7.04% – the highest since 1982 and higher than the 2008 peak of 5.6%. With rising inflation becoming more apparent, inflationary worries began to show up in consumer confidence indexes (such as the Michigan Consumer Sentiment Index), which started to decrease in April and have not been this low since 2011.
Asset Class Review
Equity markets had another strong year as the economy continued to rebound from the pandemic drawdowns and the rollout of COVID vaccines globally increased optimism in the markets that the worst of the pandemic was behind us. With seventy new highs in 2021, the most since 77 in 1995, the U.S. equity markets were stronger than international markets as non-U.S. equities underperformed the U.S. (S&P 500) for the tenth year of the last twelve. As individuals began to venture out and revert to normal pre-pandemic behavior, stay at home stocks and companies that helped people during the pandemic, like Zoom and Peloton, fared poorly. The S&P 500 had its best performance relative to the NASDAQ since 2002. Following up on a strong 2020, the S&P 500, DJ and NASDAQ all had the best 3-year performance period since 1999. The S&P 500 had its third year of double-digit gains despite the drawdown during the start of the pandemic. The Fed maintained loose monetary policies, that were implemented to combat the pandemic, well into the year. With reflationary concerns in the beginning of the year, low duration assets like value did well, but that ended around mid-year when the Delta variant concerns emerged. The Russell 2000 Value index was the strongest style index over the full year with a total return of 28.27% compared to the tech heavy Russell 1000 Growth index at 27.60%. The Large cap tech-heavy Russell 1000 Growth propelled over small cap growth in second half of the year when rates started to ease mid-summer. The Russell 1000 gains in 2021 were led by Energy, Real Estate, Tech and Financials. The Russell 2000 gains in 2021 were led by Energy, Financials and Consumer Discretionary. All eleven sectors in the S&P 500 returned over 14% for the first time since 1995. Large caps outperformed small caps (measured by Russell indices) but within the S&P 500 the fifty smallest stocks outperformed the fifty largest. With a significant interest from retail traders, option volumes hit the highest level since data started in 1973 with option activity surpassing stock activity in 2021 (CBOE). IPOs had a strong year in 2021, with the most money ever raised with over 1,055 listings including SPACs. However, two thirds of IPOs are currently below the price with which they went public, and the average decreased 9.8% over the year (source CANNAN Advisors).
Fixed Income Markets
Treasury rates started the year at lows and sold off further as people began to get vaccinated and the economy reopened. Markets were pricing in a reflationary environment with break-evens widening sharply too. Even in this reflationary environment, inflation started the year below 1% and rose to around 7% but over the course of the year the 10-year Treasury rate rose only 50bps. According to Mercer, this was the worst start to a year since 1830 for bonds. As mid-year approached, nominal bonds rallied as the Delta variant emerged. Credit spreads which had tightened to historic levels began to widen in October. Spreads remained tight throughout much of the year (Apr-Nov), between the 90-95 range. The Bloomberg Aggregate Bond Index, a mix of government and investment grade corporate fixed income, had its first year in the red since 2013 with a -1.54% return. Sectors with typically higher yields or in better position to handle rising inflation, like TIPS and floating rate bonds, did well. High Yield Bonds ended 2021 with returns of 5.28% on the back of lower-than-average default rates of 0.38% vs. the long-run average of 3.66%, higher recovery rates (44.90% vs. 39.60%) and tighter than average spreads.
As the economy began to reopen in 2021, consumers, armed with their increased savings, started spending again particularly on goods as there was still some hesitation on flying, dining out, attending entertainment venues and enjoying other services at pre-pandemic levels. The increase in inflation, along with the view that it may not be transitory, had a positive impact on real assets, from REITs to industrial metals. The global recovery, which strained supply chains, led commodities (as measured by the S&P GSCI Index) to outperform the S&P 500 40.35% vs. 28.71%. Only precious metals, such as gold, were in the red with a -5.13% performance vs the top performer energy at 60.72%. Gold itself had its worst performance in 6 years as the strengthening U.S. dollar and rebounding economy diminished its attractiveness as a safe haven asset. Copper, itself an industrial metal, along with its positive correlation to rising markets was up over 25% last year (S&P GSCI Copper). The FTSE NAREIT All Equity REIT index, representing U.S. REITs returned 41.3% the second-best year since the index started at the end of 1971. Leading all sectors was self-storage with a 79% return with Home Financing and Health Care sectors bringing up the rear with 11.5% and 16.3% returns, respectively.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other information is contained in the Fund’s prospectus, which can be obtained by calling 888-814-8180 and should be read carefully before investing. Additional Fund literature may be obtained by visiting www.EasterlyFunds.com.
Past performance is not a guarantee nor a reliable indicator of future results. As with any investment, there are risks. There is no assurance that any portfolio will achieve its investment objective. Mutual funds involve risk, including possible loss of principal. The Easterly Funds are distributed by Ultimus Fund Distributors, LLC. Easterly Funds, LLC is not affiliated with Ultimus Fund Distributors, LLC, member FINRA/SIPC. Certain associates of Easterly Funds, LLC are registered with FDX Capital LLC, member FINRA/SIPC.
Risks & Disclosures
Easterly Funds, LLC and Easterly Investment Partners, LLC both serve as the Advisors to the Easterly Fund family of mutual funds and related portfolios. Both Easterly Funds, LLC and Easterly Investment Partners, LLC are registered as investment advisers with the SEC. Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus, or if available, a summary prospectus containing this and other important information. Read it carefully before you invest or send money. Mutual Funds are distributed by Ultimus
Fund Distributors, LLC, member FINRA/SIPC. Although Easterly Funds, LLC and Easterly Investment Partners, LLC are registered investment advisers, registration itself does not imply and should not be interpreted to imply any particular level of skill or training.
THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY OR WHITE PAPER SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.