2021 Equity Markets In Review

Updated: Feb 20

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.


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.

Yield Curve: US and CAD T-bond Less T-bill Rate
Yield Curve: US and CAD T-bond Less T-bill Rate

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.

US Expected Inflation
US Expected Inflation

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%.