Wed. Jan 26th, 2022

World stock markets closed 2021 for the third consecutive year with double-digit gains, as easy monetary policy and a flood of fiscal stimulus helped drive an economic recovery from the pandemic.

The FTSE All-World stock index rose 16.7 percent in dollar terms in 2021, surpassing the previous year’s 14.1 percent gain, but fell short of the 24 percent jump in 2019, the year before the coronavirus crisis.

Investors came in positive in 2021 over the year ahead, with vaccines starting to roll out and pent-up demand is expected to lead to an economic revival.

Supporting policies of many of the world’s largest central banks have helped push financial markets higher, bolstered by government stimulus packages and a resurgence of the most severe restrictions imposed to try to contain Covid-19 infections.

The prospect of the central bank removing crisis-era support for financial markets, coupled with increasing cases of Covid-19 stemming from the rapid spread of the Omicron variant, threatened to change investors’ fortunes by the end of the year . However, stock markets pulled through the increased volatility which, despite putting a lid on runaway profits, failed to derail the rally.

The World Index expressed a gain of almost 1 percent from its peak in September to 31 December.

“It was incredible,” said Kristina Hooper, chief global market strategist at Invesco. “Monetary policy, fiscal stimulus and the deployment of vaccines have been powerful engines for equities.”

Column chart of FTSE All-World index showing global equities roaring higher

The favorable conditions helped corporate earnings to recover from losses suffered in 2020 when the pandemic hit economic activity.

Companies were largely able to pass on a sharp rise in prices as economic demand exceeded supply, enabling them to benefit from the reopening of the world economy.

In the US, year-on-year earnings growth is forecast to reach 45 percent as soon as the fourth quarter reports are in, the highest on record according to FactSet data back to 2008.

“There are shortages of every good imaginable, runaway inflation, political strife, racial and class wars, but there are also some of the best corporate earnings ever,” said Jim Paulsen, chief investment officer at Leuthold Group. “It’s bizarre, but it’s hard to keep the stock market in the face of such a revival.”

The rise in global stock markets is particularly pronounced in the US. Wall Street’s blue-chip S&P 500-meter climbed nearly 27 percent this year, led by a nearly 50 percent surge in energy stocks as oil prices soared, and followed by a more than 40 percent rise in real estate stocks.

Devon Energy topped the index with a gain of nearly 190 percent. A total of 11 companies have at least doubled their share price, including Ford Motor, Moderna and Marathon Oil.

This is a shift from the previous two years where the technology sector, which still made a 33 percent profit in 2021, dragged the market higher. Cathie Wood’s Ark Innovation exchange-traded fund fell more than 23 percent this year, in a sharp reversal of the fortune of its meteoric 150 percent profit in 2020, made by betting on some of the top-performing technology companies through the pandemic.

Nevertheless, the largest technology stocks still stood out as the biggest contributors to the S&P 500’s profits. Their colossal size relative to other companies made their comparatively smaller share price increases more impact due to the way the index is weighted.

The top six contributors to the S&P 500’s performance were all big technology names, led by Microsoft and Apple, the two largest companies in the world by market capitalization. The behemoths, valued at $ 2.5tn and $ 2.9tn respectively, have risen 51 percent and nearly 34 percent over the past year.

Technology also continued to push markets higher across the Atlantic, leading a 22 percent gain for the pan-European Stoxx 600 index. This is the second-best performance for the index since 2009, and it is little more than a gain of 23 percent in 2019.

In Asia, Japanese equities also experienced a strong year, with the Topix index rising 10.4 percent compared to a rise of less than 5 percent in 2020.

Yet, in contrast to strong gains across developed markets, Hong Kong’s Hang Seng index fell more than 14 percent, plagued by regulatory repression by Beijing, which targeted the education and technology sectors in particular. The mainland China CSI 300 index fell more than 5 percent.

The decline contributed to a 5.3 percent drop in dollar terms in the broader MSCI Emerging Markets Index. A similar index of MSCI excluding Chinese equities rose more than 9 percent.

Line chart of% change in local currency terms showing US equities loading higher in 2021 while Hong Kong lags behind

Towards 2022, investors remain cautiously optimistic about the potential for equities to continue their upward trajectory.

Covid-19 cases have continued to increase around the world amid concerns about how far the new tribe could affect supply chains, the cost of goods and company performance. Dizzying stock market swing in the wake of the rise of the Omicron variant underlined how confident can be shaken by unexpected pandemic twists.

At the same time, the tightening of monetary policy offers another prospective wind for the year ahead.

US Federal Reserve officials expects to raise interest rates three times in 2022, as the central bank moves to dampen inflationary pressures. The Fed also outlined plans in December to double the rate at which it withdraws its pandemic-era $ 120 billion-a-month bond buying program.

Nevertheless, the rapid rise in stock prices when aligned with other asset classes means they will retain their appeal in the new year, several investors said. All with some tremor.

“I think there will be a share correction by the end of the first quarter. Not necessarily a sustained correction, but still a correction, ”said Andrew Brenner, head of international fixed income at National Alliance Securities. “But there is nothing stopping stocks from recovering for the first part of the year.”

Unsecured – Markets, finance and strong opinion

Robert Armstrong dissects the major market trends and discusses how Wall Street’s best minds react to them. Sign in here to have the newsletter sent straight to your inbox every weekday

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