The month of December saw a general rise in equity markets, despite still negative news on the healthcare front and signs of the approaching end of accommodative monetary policies.
The post-coronavirus recovery continues, despite declining dynamics. Therefore, at its December meeting, the US Central Bank (FED) decided, as planned, to reduce bond purchases more faster, no longer by USD 15 but by USD 30 billion per month. In addition, up to three rate increases are expected for coming year. For 2023, interest rates are now set at 1.6%. The bond markets were not impressed by the news, since a great deal was already expected in advance. A tighter monetary policy is also slowly emerging in Europe. The Bank of England (BoE) increased its key interest rate from 0.1 to 0.25%. The European Central Bank (ECB) continues to maintain its interest rate forecast (no increase before 2023) but will end the pandemic emergency program “PEPP” at the end of March 2022. In contrast, there were no changes at the Swiss National Bank (SNB) which, in its fight against the strength of the franc, will continue to rely on interventions in the foreign exchange market.
The markets have cheered the year end and December ended with solid equity performance as the concerns for the Covid omicron variant have diminished. The MSCI World Index was up 4.5%. In the United States, the S&P500 index closed the month at +4.30%, lagging behind but still in positive territory +0.70% Nasdaq. In Europe, the Euro Stoxx 50 index had a good month with a performance of +5.70%, although it is still below the peak recorded in mid-November. Switzerland also performed well, with the SMI index up 5%. Asian markets fluctuated, with Hong Kong closing the month at -1.1%, China at +2% and the Nikkei +3%.
In terms of the macro view, 2021 was another year marked by the pandemic and a transition to the normality, although the virus is still very much present and new living habits and rules apply. In 2021 we saw the wide availability of vaccines, fiscal stimulus, economic reopening, and strong earnings growth, with fears of new COVID-19 variants and elevated inflation. Stocks and commodities rallied, while bonds sold off with real interest rates still at the lowest levels. As the vaccination rollout gained pace, economy was gaining a full speed and earnings growth had significant upside surprises. The main topics this year beyond the covid, were the high inflation and supply chain disruptions that produced market volatility during the year. The bonds market have underperformed due to the high inflation rates and central banks hawkish stance as we were approaching the year end.
From an equity market perspective, the more rapid normalization of international monetary policy means that investor attention should shift from interest rate sensitive growth stocks to quality equities in 2022.