When it came to the economy, 2021 made for a wild ride: broken supply chains, spiking inflation, plummeting unemployment, changes in the Fed’s stance, and, despite all this, an estimated GDP growth of 8.7%. Here are 10 charts that we believe best reflect the roller-coaster year.
Shipping costs and inflation spiked together
COVID-related supply-chain disruptions and heavy congestion at U.S. ports caused a surge in shipping costs in 2021, and those have largely been passed through to consumers eager to release their pent-up demand. The increase in prices has been higher and more prolonged that most expected, leading the Federal Reserve to recently drop the adjective “transitory” to describe today’s inflation.
Home prices and rents reached new heights
Strong demand, limited supply, increased material costs, record-low interest rates and increased personal savings helped propel home prices and rents to new heights. Homebuyers spent almost 15% more on new homes in 2021, and rent for multifamily apartments rose nearly 14% year-over-year through October.
Oil and gas climbed upward
The WTI, a benchmark representing oil produced in the U.S., started the year sub-$50 per barrel, but oil prices quickly rose as OPEC+ continued its tight grip on supply, and COVID restrictions eased and economies opened to increase demand. The rise in oil prices was a bright spot for energy companies, which had suffered in 2020 from a pandemic-related price freefall to below $15 per barrel.
Unemployment dropped as the hiring net widened for companies
For 2021, the unemployment rate fell 10 out of the first 11 months, starting at 6.3% in January and ending at 4.2% in November. Many companies have adapted to the new pandemic-caused work environment, embracing work-from-home and hybrid work-life models that have created greater access to talent.
Small business owners couldn’t find enough workers
As COVID restrictions eased and demand grew, small business owners faced another pandemic-related challenge in 2021: filling positions. For all U.S. companies, there were a record-high 11 million open positions by the end of October. The causes were many for those reluctant to get back to work, including the fear of COVID, refusal to get vaccinated, childcare issues, and savings from extended unemployment benefits. For small business owners, the staff shortage has resulted in rising wages, slower deliveries and shorter hours.
The Fed’s interest-rate projections: How they started, how they’re going
As the economy continued to grow and inflation stayed high, the Federal Reserve began to adjust its projections for future interest-rate hikes. Expectations at the start of the year were for just one hike in 2022. Now, that number stands at three.
Fearing interest-rate hikes, investors shortened duration
While investors saw some periods of risk-off selling and volatility, much of 2021 was highlighted by fears of rising interest rates and inflationary pressures. Investors saw a shift in the risk associated with more duration-sensitive securities, including U.S. Treasuries, mortgage-backed securities, commercial mortgage-backed securities and investment-grade corporate bonds.
Rising stars shined; a record-low number of angels fell
2021 was a stunning reversal of the previous year, as the pace of “rising stars” (upgraded rating) outpaced those of “fallen angels” (downgraded from an investment-grade to high-yield rating). Businesses continued to deleverage and shore-up balance sheets amid an improving economy, helping propel companies that were able to take advantage of the low interest-rate environment into the good graces of rating agencies. The year only saw four fallen angels, a record low.
CLOs saw record issuance propelled by several tailwinds
In 2021, demand for yield, interest-rate hike expectations and the imminent transition from LIBOR to SOFR provided tailwinds for collateralized loan obligations (CLO) issuance. For the year, the asset class saw record new-issue volume, causing many new warehouses to be opened at the tail end of 2021. With expectations for 2022 CLO issuance to only see a minor drop from 2021, the asset class looks well-poised to continue to ride the waves of strong demand and likely higher interest rates.
Bank loans benefitted from low default rates
Bank loans were a bright spot for fixed-income investors in 2021, as the asset class benefited from strong investor demand at the retail level and from CLOs. Companies were able to take advantage of record-low interest rates and refinance expensive debt and/or engage in mergers and acquisitions, strengthening weakened balance sheets from 2020 while also setting the groundwork for potential growth. All of this helped many companies avoid default and establish a better fundamental base. With the market expecting three rate hikes by the Federal Reserve in the next 14 months, bank loans look poised for another strong run as investors may need to prepare for a potential anti-bond/duration year.
The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel.
The Bloomberg Mortgage-Backed Securities Index is a market value-weighted index composed of agency mortgage-backed pass-through securities of the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac) with a minimum $150 million par amount outstanding and a weighted-average maturity of at least 1 year.
The Bloomberg US Aggregate Bond Index is composed of investment-grade U.S. government bonds, investment-grade corporate bonds, mortgage pass-through securities, and asset-backed securities, and is commonly used to track the performance of U.S. investment-grade bonds. Correlation measures how a fund’s return moves in relation to an index benchmark. The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. senior secure-credit (leveraged-loan) market.
The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.
The Bloomberg US Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets.
The Bloomberg US Treasury Index includes public obligations of the U.S. Treasury.
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
The Credit Suisse Leveraged Loan Index is an index of U.S. dollar-denominated leveraged loan market securities.
A collateralized loan obligation (CLO) is a single security backed by a pool of debt.
LIBOR (London Interbank Offered Rate) is the benchmark reference for interest rates that banks charge each other for debt instruments and loans.
SOFR (Secured Overnight Financing Rate) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
The S&P CoreLogic Case-Shiller Index measures U.S. residential real estate prices, tracking changes in the value of residential real estate nationally.
A rising star bond is a non-investment grade bond with the potential to be upgraded.
Fallen angels refers to investment grade bonds that are given a reduced rating to “junk bond” due to a decline in the credit rating of the issuer.
About Principal Risks: Past performance does not guarantee future results. All investing involves risks including the possible loss of the principal amount invested. There is no guarantee the Funds will achieve their investment goal. Corporate bonds are subject to issuer risk in that their value may decline for reasons directly related to the issuer of the security. Not all U.S. government securities are checked or guaranteed by the U.S. government, and different government securities are subject to varying degrees of credit risk. Mortgage-related and other asset-backed securities are subject to certain rules affecting the housing market or the market for the assets underlying such securities. The Funds are subject to liquidity risk (the risk that an investment may be difficult to purchase, value, and sell particularly during adverse market conditions, because there is a limited market for the investment, or there are restrictions on resale) and credit risk (the risk an issuer may be unable or unwilling to meet its financial obligations, risking default).High-yield/high-risk bonds (“junk bonds”) and floating rate loans (usually rated below investment grade) have greater risk of default than higher-rated securities/higher-quality bonds that may have a lower yield. The Funds are also subject to foreign-markets risk.
The views in this commentary are as of December 21, 2021 and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant.
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