In December, investors became more optimistic. Stocks ended the year on a positive note.
Our expert, Alexandre Gauthy, analyzes market trends in December 2021.
Equity markets: the traditional year-end rise
In December, European equities (+6.3% in euros) outperformed US equities (+3.5% in euros) and emerging markets (+1.3% in euros). The major US indices all rose in December, with the S&P posting its third-best monthly performance of the year. The S&P 500 also hit a new record high in the last week of the month, following two consecutive weeks of strong capital inflows. Performance stocks such as health care and non-cyclical consumer goods outperformed the growth style. The consumer discretionary sector lagged for the month. Tesla (-7.7%) and AMZN (-4.9%) lost ground in December. Inflation remained a negative factor for investor sentiment in December. At 6.9%, U.S. inflation reached a level not seen since June 1982. Inflation was one of the factors that prompted the Fed to accelerate the reduction of its asset purchases from $15 billion per month, as announced in November, to $30 billion per month. However, the Fed's impact on the markets was mitigated by the expectation that monetary policy will remain accommodative, even if the Fed ends asset purchases and begins raising rates in 2022. On the political side, a crisis over raising the US debt ceiling was averted in December. In contrast, the Biden administration's $1.17 trillion stimulus package suffered a major setback after Democratic Senator Manchin refused to support the bill. Daily cases of COVID-19 in the U.S. reached new records, exceeding 580,000 new cases on December 30, a figure twice as high as the previous record set in January 2021. The U.S. shortened its isolation policy for COVID-infected people from 10 to 5 days, provided they are symptom-free. Some studies have shown that people infected with the Omicron variant were much less likely to be hospitalized than those with the Delta variant. This news limited the negative impact of the increase in new cases for the markets.
Bond markets: a rise in long-term rates
U.S. Treasuries had a slightly negative performance in December. The U.S. 10-year yield rose slightly from 1.45% to 1.51%. The German benchmark rate rose more sharply, climbing from -0.34% to -0.18% over the month. Government bond yields in other eurozone countries, such as Spain and Italy, also rose by about 0.20% over the month, in line with the rise in the German rate. High-yield corporate bonds performed positively in December as spreads fell, reflecting pro-risk investor sentiment.
Central banks: towards a withdrawal of monetary aid
The major central banks held their monetary policy meetings in December. At the mid-December FOMC meeting, the Fed doubled the pace at which it is reducing its asset purchases and changed its economic projections. The Fed dropped language describing inflation as largely transitory, noting instead that supply and reopening problems "have continued to contribute" to high inflation. The Fed now expects core inflation to be 2.7 percent in 2022, up from a previous projection of 2.3 percent. In addition, the Fed expects this measure of inflation to remain above 2 percent in 2023 and 2024. In addition, the Fed believes the unemployment rate will fall to 3.5 percent by the end of 2022, down from a previous estimate of 3.5 percent by the end of 2023. Reflecting high inflation and faster improvement in labor market conditions, the median rate projection for 2022 has been raised from zero to one rate hike to three rate hikes. The same median projection calls for a policy rate of 2.1 percent in 2024.
The European Central Bank's statement confirms that it will end its net asset purchases under the Pandemic Purchase Program ("PPP") in March 2022. But, as expected, the ECB has committed to simultaneously step-up regular purchases under the Asset Purchase Program ("APP"). This is, however, a significant reduction in monetary support. And the commitment to further reduce the APP to 20 billion euros per month is a bit more aggressive than the markets had anticipated. The most striking change is in the inflation forecast for 2022, which nearly doubled from 1.7 percent in the September forecast to 3.2 percent in December. But the most significant increase is in the inflation forecast at the end of the "projection horizon." It went from 1.5 percent in 2023 in the September forecast to an inflation forecast of 1.8 percent in 2024. Finally, the Central Bank of England and the Norwegian Central Bank raised their policy rates in December in response to rising inflation.
Currencies: Dollar broadly stable, Turkish lira yo-yoing
The dollar index was broadly stable in December. The yen lost ground against the euro and the dollar last month. The Norwegian krone appreciated in December, thanks to the rebound in oil prices and the central bank's December rate hike, which was not fully anticipated by the market.
The Turkish lira depreciated sharply at the beginning of the month following the central bank's rate cut announcements and the support of the Turkish president. Then, the currency rebounded strongly at the end of the month thanks to the implementation of a program to compensate savers if the currency depreciates by more than the interest rate on those deposits. The price of bitcoin fell by 18% in December, probably due to the announced change in US monetary policy.
Commodities: rebound in oil prices
Gold rose 2.9% in dollar terms in December. WTI crude oil rose 13.6%, erasing some of the 21% declines in November. Finally, agricultural commodities performed 3% in December, while industrial metals performed 5% for the month.