We thought that one year of uncharted territory would be enough, but alas, it was not to be. Year two of the pandemic continued to bring surprising results. The “new normal” seems to have become “nothing is normal.” As the year wound down, the head scratching over inflation, resurgence of Covid cases, and policy uncertainty given extreme political polarization continued apace. As the attached monthly market snapshots show, the financial markets ultimately shrugged most of this off; equities largely roared ahead, and interest rates gyrated somewhat but changed little by quarter’s end (except for short maturities). Credit spreads widened quite modestly in the fourth quarter but spread product generally produced positive excess returns for the year.

Fed policy had emerged during the year as being focused on employment since, Fed Governors argued, inflation was “transitory.”  Specifically, the objectives were to bring the labor participation rate up and the unemployment rate down. By November, the unemployment rate had fallen to 4.2%, a quite reasonable number by historical standards albeit still above the 3.8% pre-pandemic rate. More problematic was the participation rate, which although recovering from the lows of 2020 was still well below the pre-pandemic level. In keeping with the theme of “nothing is normal,” however, employers around the country were decrying the shortage of workers and the need to raise wages.

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