Strong global growth helped to push many major asset classes to new
all-time highs in 2021. Now that global growth may be plateauing, investors will need to be more discerning in the coming year.
Global asset classes in 2021
Major stock and bond index total returns, year-to-date
Source: Clearnomics, Standard & Poor's, NASDAQ, Russell Investments, MSCI, Bloomberg. EAFE = MSCI EAFE Index. Fixed Income = iShares Core U.S. Bond Aggregate Index. EM = MSCI Emerging Markets Index. Data as of December 28, 2021.
Many major asset classes performed well in 2021, validating our optimistic views entering the year. U.S. stocks gained 29% with dividends, small caps rose 15% and international developed markets gained 12%. These add to 2020's strong returns despite ongoing concerns around inflation, monetary policy and the persistence of COVID-19. In contrast, bonds struggled as interest rates rose, and emerging markets underperformed due to the pandemic and challenges in China.
Many of these issues will linger into 2022, especially as global growth plateaus. Elevated inflation could last through the first half of the year as supply and demand imbalances remain. The U.S. Federal Reserve has already been forced to accelerate the taper process, which could lead to faster rate hikes. And, as the economy slows, earnings could decelerate, forcing valuations even higher.
These concerns underscore the importance of diversification in the year ahead, especially for retirement portfolios. Even with greater headwinds, it is still the case that solid economic fundamentals, strong corporate balance sheets and elevated household savings should support risk assets. However, investors may need to expand traditional portfolios, adjusting the standard 60/40, to include asset classes such as private equity and credit, as well as real assets, which can potentially generate greater income and reduce volatility as we move "past the peak."
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