I am pretty sure that the Year 2022 will go down as the year when the Federal Reserve went to massive lengths to battle inflation. The highs we captured in 2021 quickly reversed as the Fed executed the most aggressive rate-hike path in decades. Granted, the war in Ukraine nor China’s zero Covid policy didn’t help things from abroad. Hence, both stocks and bonds tumbled.
And as we turn the page on a new calendar year, note that conditions have not changed much. The New Year is simply a passage of time and doesn’t mean material changes for the path of the global economy. Questions about a possible recession in the future swirl around us, and people wonder if the U.S. is in for a soft or hard landing. Nonetheless, let’s see how some of the major market components did recently and then we’ll dive in a little further:
|Index||4th Quarter||1 Year||5 Year|
|S&P 500 Large Cap Index||+7.08%||-19.44%||+7.51%|
|S&P Small Cap 600 Index||+8.69%||-17.42%||+4.33%|
|S&P Developed BMI International Index||+9.67%||-19.99%||+3.66%|
|S&P U.S. Aggregate Bond Index (total return)||+1.64%||-12.03%||+0.16%|
|S&P Municipal Bond Index (total return)||+3.91%||-8.05%||+1.32%|
|Dow Jones Equity All REIT Index||+3.15%||-27.60%||+0.83%|
|Dow Jones Commodity Index (total return)||+6.16%||+20.63%||+8.96%|
SOURCE: DOW JONES, DATA AS/OF 12-31-2022 (DOESN’T INCLUDE DIVIDENDS UNLESS NOTED). HERE IS A COMPREHENSIVE LIST OF RETURNS.
Looking back, here are some observations.
Stock markets rounded off a tumultuous year with gains in Q4. Unlike the first three quarters of 2022, performance was decent for the S&P500, Russell 2000, and DJIA. This mostly occurred in November. International indexes were up solidly as well. So that was good to see.
Contrastingly, the NASDAQ lagged and underperformed for the quarter, again. The tech-heavy index fell slightly as expectations for higher rates and slower economic growth weighed on technology stocks.
In the U.S., large-cap stocks slightly outperformed small-caps and this was the case for the entire year. Value stocks massively outperformed growth stocks, as value stocks were viewed as more attractive with their lower valuations. The energy sector continued its hot 2022 campaign and again shined in Q4. In fact, energy was only 1 of 2 sectors to have positive 2022 returns (utilities were the other). Exxon and Chevron posted record profits.
Bonds rallied in Q4 as well. By rally, I mean that interest rates relatively pulled back so prices of bonds went up. Still, with the double whammy of negative bonds and negative stocks in 2022, market academics commented that the typical “60-40% stock/bond portfolio” had its annual worse return in years.
Developed international markets mostly outperformed the U.S. markets in Q4. This is interesting because of the geopolitical risks brought to life by this Russian invasion of Ukraine. Beyond the devastating human suffering, one has to wonder about the impact on food and energy supplies playing out in 2023. I just wish it would all end!
In looking at the 10-year Treasury benchmark, it fluctuated over the three months (peaking at 4.20% in October) but ended relatively flat for the quarter. Over the year it jumped from 1.51% to a close at year-end of 3.87%. Quite a newsworthy jump.
Housing demand is driven by a number of factors but primarily follows this 10-year yield. We saw fixed-rate mortgages jump from @3.22% in January to around 6.42% in December. Little wonder then, home sales dropped and house prices weakened in 2022.
Inflation has shown signs of peaking and declining. The Consumer Price Index fell from a high of 9.1% in June to 7.1% in November, and other similar metrics of inflation registered similar declines.
Here’s one chart showing the past two years of inflation numbers:
Other Thoughts from 2022:
Here are some thoughts on what happened over the course of the year, and how global markets reacted. Many of these were pronounced in various media outlets, so you may be familiar.
In the thumbs-down category, U.S. stock market indexes turned in annual lows not seen since 2008. For the most part, it was the big tech stocks taking a bath. For example, Facebook (Meta), Netflix, Nvidia, and Tesla were all down over 50% in 2022.
As mentioned above, bonds also had a down year as the U.S. Federal Reserve raised rates to tamp down inflation. High-grade corporate bonds experienced a double-digit loss, mainly because rates went up so drastically. The U.K.’s economic policies resulted in Liz Truss becoming its shortest-tenured prime minister ever, while Russia’s invasion of Ukraine and China’s continued COVID woes kept the global economy in a tailspin.
Cryptocurrency exchanges like FTX … well, you know what happened there. It’s currently playing out in real-time on TV.
On the plus side, we’ve seen inflation easing slightly, and so far, a recession has yet to materialize. A globally diversified, value-tilted strategy has helped protect against some (certainly not all) of the worst returns.
An 8.7% Cost-of-Living Adjustment (COLA) for Social Security recipients has helped ease some of the spending sting, as should some of the provisions within the newly enacted SECURE 2.0 Act of 2022 (which we wrote more about here).
Now, how much of this did you see coming last January? Given the unique blend of social, political, and economic news that defined the year, it’s unlikely anything but blind luck could have led to accurate expectations at the outset.
In fact, even if you believe you knew we were in for trouble back then, it’s entirely possible you are altering reality, thanks to recency and hindsight bias. The Wall Street Journal’s Jason Zweig ran an experiment to demonstrate how our memories can deceive us like that. Last January, he asked readers to send in their market predictions for 2022. Then, toward year-end, he asked them to recall their predictions (without peeking). The conclusion: “[Respondents] remembered being much less bullish than they had been in real-time.”
In other words, just after most markets had experienced a banner year of high returns in 2021, many people were predicting more of the same. Then, the reality of a demoralizing year rewrote their memories; they subconsciously overlaid their original optimism with today’s pessimism.
Where does this leave us? Clearly, there are better ways to prepare for the future than being influenced by current market conditions, and how we’re feeling about them today. Instead, everything we cannot yet know will shape near-term market returns, while everything we’ve learned from decades of disciplined investing should shape our long-range investment plans.
We fully expect the financial media to be focused on the 2022 losses, current market risks, and recession fears. But keep a glass-half-full approach – not focusing solely on the challenges ahead. Remember, the market is forward-looking, some of those risks are partially priced into markets already. And truthfully there are several positive catalysts lurking as we start the new year as well.
We wish you and yours a happy and healthy 2023, come what may in the markets. As always, let us know of any new ways we can further your financial interests at this time. This, and every year, we remain grateful for doing what we do and helping people become more financially vigilant.
Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. The information should not be construed as legal, tax, nor investment advice. Never make investment or financial decisions based on information provided here, without first consulting with your professional investment advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Dow Jones. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.