The year 2021 saw exceptional gains in the stock market as the global economy continued to recover from the COVID-19 pandemic. Canadian and U.S. equities climbed steadily higher during much of the year, despite uncertainty about the course of the pandemic and concerns about inflation, supply chain disruptions and labour shortages.
The Canadian stock market enjoyed its best year since 2009, returning 25.1%. The U.S. stock market was equally strong, producing a Canadian dollar return of 24.6%.
After several years of underperformance versus growth stocks, value stocks finally gave a solid boost to 2021 returns. Value equities delivered a 35.9% return in Canada and 26.6% in the U.S. This was good news for PWL clients because we tilt our portfolios to value stocks, based on evidence that this asset class generates higher expected returns. The robust returns from value stocks in 2021 were a reminder that investing success often requires patience and discipline, knowing that the academics behind PWL’s investment philosophy are sound.
Elsewhere, it was also an outstanding year for real estate investment trusts. Canadian REITs returned 35.1% while global REITs were ahead 31.4%. Returns in international equity markets were more modest with developed markets outside Canada and the U.S. returning 10.1%. Emerging markets were the only equity asset class that delivered negative returns for the year—minus 3.1%. Returns on foreign stocks were marginally tempered by a stronger Canadian dollar, which was supported by a rebound in energy prices.
Despite the waxing and waning of the pandemic, the Canadian economy turned in a solid performance with GDP growing by 4.0% year over year to the end of the third quarter. On the jobs front, it was a record year for hiring with 885,000 more people employed in 2021, sending the unemployment rate to 5.9% by year end. Both full-time and women employed exceeded pre-pandemic levels.
Concern about inflation was a persistent theme in 2021. The strong economy, coupled with supply chain disruptions, sent the consumer price index in November to 4.7% in Canada, a 30-year high, and 6.8% in the U.S. That prompted the Bank of Canada and the U.S. Federal Reserve to move up plans to reduce monetary stimulus and increase interest rates in 2022, although both central banks expect inflation to moderate this year.
Rising interest rates led to rare negative returns from bonds. The total Canadian bond market delivered a -2.5% return while short-term bonds returned -0.9%. The total global bond market returned -1.4% in Canadian dollars while short-term global bonds returned -0.8%.
Last year was marked by an unusual lack of the volatility in the stock market with only a few brief sell-offs. The S&P 500 index saw 70 all-time highs during the year. However, you only have to think back to the COVID crash of February and March 2020 to know that volatility and risk remain facts of life for long-term investors. That’s why at PWL we maintain our disciplined approach to constructing broadly diversified, low-cost, tax efficient portfolios that are periodically rebalanced. In 2022, we will stick to our strategy because we know from long experience that it is the best way to build wealth over the long term for our clients.
