In Jan 2020, Corona Virus Disease (COVID-19) spread across the globe, severely impacting the world economy and financial markets, in April 2020 WTI futures market collapsed amid lack of storage, in May governments started easing COVID-19 restrictions, in Sept the second wave of the pandemic started, in November Biden became the US president-elect, in December the COVID-19 Vaccine was finally approved and as of June 2021 vaccination is in full swing and equity markets have been on the rise. This is an overview of Year to Date (YTD) benchmark yields, currencies, commodities, indices, ETFs, sectors, and stock performance as of Dec 31, 2021. For a comprehensive report Dec 2021 Review: A Strong 2021 for Equity Markets & USD Despite Rising Inflation & Rate Hikes, please refer to Basic Modelyze.
Overview
Capital markets have had a strong rebound in 2021 with the successful rollout of COVID-19 vaccine and despite the spread of Omicron, as restrictions are lifting and markets start to recoup losses. Bargain basements[1] of 2020 due to the outbreak of COVID-19, economic shutdown and April 2020 oil market collapse, have been among the winners of 2021 and high yield, low size and value stocks continue to rise during the early stage of the economic cycle recovery. Since Jan 1st, 2021, S&P 500 has gained 27%, NASDAQ 100 has gained 27%, Wilshire 5000 has gained 23%, TSX composite index has gained 22%, Dow Jones Industrial Average index has gained 19%, Russell 2000 has gained 14%, US Gold/Silver index has declined by 8%, Brent Crude Electronic Energy one-month Future has climbed by 50%, NYMEX Gasoline Electronic Energy one-month Future has climbed by 58%, and NYMEX Light Sweet Crude Oil (WTI) Electronic Energy one-month Future has gained 55%. US and Canadian 10-year benchmark yields have advanced 65% and 112% respectively while US and CA 10-year benchmark bond prices have declined by 1% and 4% since the beginning of the year; Gold one-month future contract price has declined 3% as of Dec 31, 2021.
Yield Curve and Recovery Phase
The yield spread curve advanced by 40% in the US and 26% in CA markets in 2021 given the ease of restrictions and economic reopening, Omicron spread, supply chain disruptions and inflation pressures. Feds began reducing the monthly pace of net asset purchases by $15B in treasury and MBS in Nov, adjusting the pace as warranted by changes in economic outlook, and concluding the gradual tapering process in mid-2022 if the recovery remains on track. In Sep, Feds emphasized that they expect inflation to rise from 2.4% to 3.4% in 2021 given increased levels of money supply during the pandemic and to cool off in 2022 to 2.1%, believing the rise is largely driven by transitory factors with GDP experiencing the fastest growing rates in decades. As of Dec, Feds have signaled three rate hikes in 2022 as inflation battles continues and that they would end the pandemic era bond purchases in March, paving the way for 0.75% rate hike by 2022FYE.
BoC is expected to raise interest rates before US Feds, keeping inflation target at 2%, with Canadian inflation expectation remaining high at 4.7% in the near term. The spread between the 10-yr treasury rates and TIPS rate, a proxy for expected inflation, stood at 2.6% as of Dec 31, 2021. The yield curve has displayed an upward trend since March 10th, 2020, a very steep climb during Q1/21, a sudden decline in Q2/21, a rise in Q3/21 with a sudden decline in December 2021 given Omicron spread. This could potentially point to market uncertainty with respect to the end of the pandemic era. Despite the decline in the pace of economic growth due to supply chain bottle necks and heightened inflation, a rise in interest rates due to an increase in real growth as opposed to a rise in inflation has a positive impact on public equities. With monetary velocity as indicated by the ratio of nominal GDP to M2 money supply at record lows, there is plenty of liquidity in the market to fund GDP growth.
Currencies Update
Subsequent to Feds signaling a 0.75% cumulative rate hike in 2022, USD has surrendered some of 2021 earlier gains against major currencies. Commodity backed currencies such as CAD are expected to remain strong given the rebound in oil prices. Overall, in 2021, USD strengthened against all major currencies except against CAD given the rise in oil prices. Given the expectation of rising rates, inflation and economic growth, USD advanced against the basket of developed currencies in 2021 as presented by an upward trending DXY curve, the USD Index, rising by 6.7%.
Oil, Gas, Gold, and 10YR Benchmark Bonds Update
Macroeconomic indicators are pointing to a less volatile North American economy relative to historical averages over the recent months. US and CA benchmark rates (proxy for risk free rate) climbed by 65% in US and by 112% in CA given the economic recovery, GDP growth, Fed’s hawkish stand and surging inflation. Safe-haven assets retreated with spot Gold losing 4% and gold/silver index retreating 8% in 2021, despite the spread of COVID variants, rising inflation and supply chain hiccups. Brent Crude Oil commodity one-month futures price advanced in 2021 by 50%, trading at $77.78/bbl and WTI one-month futures trading at $75.21/bbl as of Dec 31. Brent, Gasoline and WTI one-month futures have been the most volatile among 10-year benchmark bonds, Brent Crude one-month futures, WTI one-month futures, Gasoline one-month futures, Gold one-month futures and Gold spot while US and CA benchmark bonds continue to be the least volatile, indicated by low 7-day volatility of day over day (DoD) returns and given the volatility in oil & gas prices due to worries about oil demand and the spread of vaccine resistant variants.
Indices Update
Major North American indices have been climbing rapidly in 2021; as the economies open up, with the full vaccination roll out and Biden’s $1.9 trillion relief package, markets have been bouncing back; however, rising inflation and Omicron variant have slowed down the economic growth. Feds, with an expectation of inflation stabilizing in 2022, announced their plan to raise rates in three increments in 2022 and began asset tapering as of Nov and into 2022. In 2021, S&P 500, NASDAQ-100, Wilshire 5000, TSX, Dow Jones, Russell 2000 and PHLX Gold/Silver SECTOR Index returned 27%, 27%, 23%, 22%, 19%, 14% and -8% respectively. S&P500 and tech heavy NASDAQ-100 returns were the best performing Indices. Russell 2000 Index representing the small caps, was the most volatile index in 2021. The forward-looking implied volatility of indices, representing the market’s expectation of future volatility on a year over year basis declined in 2021 as COVID impact on markets wore off with GVZ retreating by 30%, VIX by 24%, VOLQ by 23%, VXD by 14%, VVIX by 2% while SKEW and OVX advancing by 3% and 13%. Covid variants, rising inflation and declining implied volatilities continued to create option trading opportunities in 2021. The monthly average implied volatilities of indices, oil ETF and SKEW is displayed below.
The elevated CBOE Skew index at 145.04 annual average with respect to the 14 year historical average of 126.51 as of the beginning of 2008, indicates the negative investor sentiments with investors trading more and paying higher for out of the money puts relative to calls, with puts trading at a volatility premium relative to calls in 2021, given the ongoing pandemic effects and uncertainty surrounding Omicron, supply chain constraints, prolonged inflation pressures and rate hikes. In general, higher skews point to elevated probability of tail risk events.
In 2021, with the bond market sell off driven mostly by a rise in treasury yields than inflation and uncertainty around the timing of Feds raising rates in 2022, implied volatility significantly jumped during the month of September; however, it significantly dropped in October given the positive earnings surprise and company earnings beating expectations at a record pace due to strong fundamentals, it significantly increased once more in November on fear of COVID variants such as Omicron, peaked mid-December ahead of Feds rate decision and dropped below the 50 and 200-day moving averages by December month end.
Exchange Traded Funds (ETF) Update
Among exchange traded funds the most beaten-up funds of 2020 have performed best YTD including Oil, Vangaurd Real Estate Index Fund, iShares US Technology ETF, XLF Financial Select Sector SPDR, Global Tech ETF, US Infrastructure, VanEck Vectors BDC Income, SPDR S&P500, MSCI Frontier 100 ETF, Global Health Care, Consumer Staples Select Sector SPDR Fund and Invesco CEF Income Composite ETF while Bitcoin Strategy ETF, Global Clean Energy, MSCI Emerging Markets ETF, SPDR Gold, Inv Grade Corporate Bond ETF, IO Merger Arbitrage ETF, SPDR Bloomberg Barclays High Yield Bond ETF, High Yield Corporate Bond ETF and SPDR Blackstone/GSO Senior Loan ETF have performed worst as of Dec 31st. As of Dec, 61% of the analyzed funds displayed positive YTD returns while Bitcoin Strategy ETF, Global Clean Energy, MSCI Emerging Markets ETF, SPDR Gold, Inv Grade Corporate Bond ETF, IO Merger Arbitrage ETF, SPDR Bloomberg Barclays High Yield Bond ETF, High Yield Corporate Bond ETF and SPDR Blackstone/GSO Senior Loan ETF demonstrated negative returns YTD. The worst performing ETF among the listed ETFs is the ProShares Bitcoin Strategy ETF dropping to 69% of its value as of Dec 31st YTD. YTD returns of dividend focused ETFs continued to advance given the yield and value stocks upbeat performance in the early stages of market recovery and during a rate rising cycle and heightened inflation.
Sector Update Year to Date
Given the reopening of the economies and vaccination against COVID-19, Publishing, Computer & Electronics Retail, Oil & Gas Exploration & Production, Industrial Conglomerates, Distillers & Vintners, Marine, Marine Ports & Services, Apparel, Accessories & Luxury Goods, Apparel Retail, Fertilizers & Agricultural Chemicals, Department Stores, Diversified Chemicals, Aluminum, Construction Materials, Specialty Stores, Coal & Consumable Fuels, Semiconductor Equipment are among the best performing sectors with Silver, Motorcycle Manufacturers, Interactive Home Entertainment, Drug Retail, Airport Services, Household Appliances, Housewares & Specialties, Internet & Direct Marketing Retail, Internet Services & Infrastructure, Biotechnology, Education Services, Precious Metals & Minerals, Heavy Electrical Equipment, Gold, Interactive Media & Services, Railroads, Auto Parts & Equipment among the worst performing sectors YTD. The most declining sectors include those businesses that significantly gained through the pandemic in 2020 due to the investors’ fear and severe lockdowns while sectors that have recouped losses and displayed higher returns this year include those related to Marine, Apparel Retail, Oil & Gas, Department Stores, Computer and Electronic Retail, Distillers & Vintners, Semiconductor Equipment as well as other 2020’s Bargain Basement sectors. Financial services sector continued to see a big jump in returns with rising interest rates, rising profits on reserves releases and lower PCLs. Surging oil prices in 2021 on average has lifted energy shares, and recovery in oil prices has provided an opening for O&G companies to shed unwanted assets through increased M&A opportunity in the sector and to increase dividends and share buybacks. The sector YTD returns has been also among the top 10 percentile of sector returns in 2021. The potential rate hikes in 2022 however will have a negative impact on tech and growth stocks that get the bulk of their value into the future. Supply chain disruption and raw material shortage continued to slow down the recovery of manufacturing industry and exports.
Stocks Update Year to Date
With the gradual recovery, rise of interest rates, significant decline of equity risk premium in mature markets relative to 2020 and surge of equity markets, in the first half of 2021, markets have been rotating away from growth & tech stocks and in favor of value names including Oil&Gas and Financials which bear the debt burden of the economy. Value, Yield and Low Size are expected to outperform in a rate rising cycle and during the early market recovery stage absent COVID variant shocks on the market. As displayed below, slicing and dicing the data into ten deciles based on public equities net debt balances from lowest to highest, in 2020 YTD returns have dropped significantly as net debt burden have increased, but this trend has faded in 2021 and companies with higher net debt balances have moved into the green zone.
Looking across North American public equities and their corporate life cycle, categorized and broken down into deciles based upon the estimate of revenue growth rate from lowest to highest, the lowest growth companies have been hurt the most during this crisis in 2020 relative to the youngest, highest growth companies, however this trend does not prove to persist in 2021 and lower growth, more mature companies have moved into the green zone. In the fourth quarter of 2021 however, the spread of COVID variants weighed on this trend in favor of growth names which was offset by Fed’s rate hike announcements and the expected rise in interest rates in 2022.
Microsoft, Alphabet, Apple, NVIDIA, Tesla, Facebook, Home Depot, UnitedHealth, Pfizer, Berkshire Hathaway, Eli Lilly and Co, Bank of America Corp and Broadcom that are a combination of System Software, Interactive Media, Technology, Auto Manufacturers, Home Improvement Retail, Managed Health Care, Pharmaceuticals, Multi Sector Holdings, Diversified Banks and Semiconductors stocks are among the US companies that collectively gained $4,064 billion YTD while Visa, PayPal, Waly Disney, Zoom, Peloton Interactive, AT&T, Verizon, Global Payments, Square, T-Mobile, Quantumscape, Fidelity National Information Services, Activision Blizzard, Pinterest and Las Vegas Sands lost $454 billion YTD (Data Processing & Outsourced Services, Movies & Entertainment, Application Software, Leisure Products, Integrated Telecommunication Services, Wireless Telecom, Auto Parts & Equipment, Interactive Home Entertainment and Casinos & Gaming). TD and Royal Bank topped the list of 2021 Canadian companies gaining $37.95B and $34.57B YTD given the Fed’s announcement about the rise in interest rates in 2022; Shopify dropped to third place among Canadian winners gaining $34.269B market cap YTD, followed by Brookfield Asset Management, Canadian Natural Resources, Bank of Montreal, Bank of Nova Scotia, Thomson Reuters, Cenovus Energy, Nutrien and Canadian Imperial Bank of Commerce, gaining collectively $267 billion. With the Feds announcement in Dec, all top five Canadian Banks were among the top Canadian winners in December while Shopify and Lululemon topped the list of December losers. Restaurant Brands International, Abcellera Biologics, Barrick Gold, Canopy Growth, Agnico Eagle Mines, Genworth MI Canada, Ballard Power Systems, Saputo, Pan American Silver, Kinross Gold, B2Gold and Zymeworks topped 2021 losers, losing $47.56 billion YTD. Evidently, bargain purchases of 2020 with strong fundamentals have regained strength in 2021 and beyond and as of Dec, Megacap tech, financial service firms and Oil&Gas companies are roaring back and have emerged on the list of top performers. Gold companies have emerged on the list of losers with the decline in gold prices YTD. Recovery in oil prices has also provided an opening for O&G companies to shed unwanted assets through increased M&A opportunities.
2021 IPO Activity
Financials, Health Care and Technology sectors continued to display the highest IPO activity throughout the year. 2021 was a record-breaking year for Live IPOs with $279.3 billion raised across 1,084 deals compared with $141.667 billion proceeds raised across 465 deals in 2020. This represents a stellar growth in transaction activity this year. Global M&A activity smashed all-time records to almost $5 trillion in 2021 given the abundance of capital and liquidity in the market.
SPAC IPOs in 2021
2021 has been a stellar, record-breaking year for special purpose acquisition companies and SPAC IPOs with $140.02 billion proceeds raised from their IPOs, across 573 deals. This beats 2020 records of $52.538 billion proceeds raised across 204 deals.
Top 5% North American Live IPOs by Size
Rivian Automotive (proceeds: $13.7B, consumer cyclicals), Blackrock Innovation & Growth Trust (proceeds: $4.4B, financials), Globalfoundries (proceeds: $2.85B, technology), Bumble (proceeds: $2.472B, technology), Shoals Technologies Group (proceeds: $2.213B, energy), Robinhood Markets (proceeds: $2.09B; industrial), Starlight US Residential Fund (proceeds: $2.051B, financials), Blackrock Esg Capital Allocation Trust (proceeds: $2.04B; financials), Pimco Dynamic Income Opportunities Fund (proceeds: $2B, financials), AppLovin (proceeds: $2B, consumer cyclical), Qualtrics International (proceeds: $1.78B, technology), Olaplex Holdings (proceeds: $1.78B; consumer-non-cyclical), GQG Partners (proceeds: $1.77B, financials), Soaring Eagle Acquisition (proceeds: $1.725B, financials), UiPath (proceeds: $1.53B, technology), and Ryan Specialty Group Holdings (proceeds: $1.538B, financials) are the largest Live IPOs since January 2021, raising $45.98B collectively. Samsara Inc is the only Dec IPO that is on the list of top 5% North American IPOs, raising $802M. The Canadian companies on the list of top 5% North American live IPOs by size since Jan 2021 are Starlight US Residential Fund, Definity Financial Corp and TELUS International (Cda) Inc., with the cumulative proceeds of $4.39B in Nov and Feb 2021.
IPO Statistics by Type
The North American equity issuance proceeds by transaction status across the months in 2021 is displayed below. Transactions in March had the highest cumulative In Progress, Live and Rumored IPO proceeds while transactions in July had the highest cumulative Postponed, Cancelled and Announced IPO proceeds, those in November had the highest cumulative Mandated IPO proceeds on the list, and December transactions had the 2nd lowest Live IPO proceeds in 2021, but the 3rd highest In Progress IPO proceeds after March and February.[2]
Find the comprehensive report, Dec 2021 Review: A Strong 2021 for Equity Markets & USD Despite Rising Inflation & Rate Hikes, on Basic Modelyze page.
Sources:
[1] Bargain Basement companies are large caps with the largest percentage market cap drops that have been beaten up during the pandemic.
[2] Charts and graphs data in this report is sourced from Refinitiv as of Dec 31, 2021, market close and include equities listed on North American exchanges. The analysis includes calculations conducted by Modelyze Investments Inc.