Stocks are not immune to the virus, but they continue to beat it.
For the third year in a row, equity fund investors have made significant gains. The average US diversified equity fund is up 22.5% for the year, according to Refinitiv Lipper data — after gains of 19.1% in 2020 and 28.3% in the year prior to the pandemic.
The equity fund’s average gain included a 6.7% advance for the fourth quarter, as many investors remained convinced that the Covid contagion wouldn’t lead to the same level of economic disruption as it did at the start of the pandemic and lockdowns in 2020.
International equity funds are up 9.6% for 2021, including a 2.3% increase in the fourth quarter.
The reason for the rally was an economic recovery that was stronger than many analysts had expected. The companies have posted some of their best results ever.
However, many investors continued to hedge their bets. As they did in 2020, investors invested more money in the relative safety of bond funds than they did in equity funds, foreign or domestic. They sent $587.10 billion net to bond-focused mutual funds and exchange-traded funds in 2021, according to the Investment Company Institute. They put $113.07 billion in US equity funds and $193.19 billion in international equity funds.
Fund performance for the whole of 2021, total return by fund type.
However, this warning was not rewarded. Bond funds are down in 2021. Funds tied to medium-maturity and investment-grade debt (the most popular type of fixed income fund) fell 1.3% for the year, including an average decline of 0.2% in the fourth quarter.
The journey could be more difficult in 2022 — at least according to some of the same analysts who underestimated 2021 — as the Federal Reserve is expected to raise interest rates, uncertainties related to the virus and supply chain problems.
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Full year 2021 investor flow Cash by fund type, in billions *
Investors can expect 2022 to be a transitional year, says Lauren Goodwin, economist and portfolio strategist at New York Life Investments. Although the world is transitioning from “the height of the pandemic to managing Covid-19 and living a more orderly life,” she says, investment managers can expect greater market volatility, and lower returns than in the past two years, as economic support for governments is reduced.
Mr. Power is a feature editor for the Wall Street Journal in South Brunswick, NJ, email him at [email protected]
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