Q4 2022 Market Review

Keeping a steady hand on the tiller as markets rock the boat is still the best way to achieve long term financial goals.

2022 was a challenging year for investors. Markets fell into bear market territory and experienced the worst annual performance since 2008. The S&P 500, Dow and Nasdaq declined 19.4%, 8.8% and 33.1%, respectively, last year. Interest rates swung wildly with the 10-year Treasury yield jumping from 1.51% at the start of the year to a high of 4.24%, before ending at 3.88%. This mirrored inflation as the Consumer Price Index climbed to a 40-year high of 9.1% in September. As a result, the Fed hiked rates seven consecutive times from 0% last March to 4.25% in December. Along the way, a myriad of other events impacted markets from the war in Ukraine to China’s zero-Covid policy, affecting everything from oil prices to the U.S. dollar.

To highlight how manic markets have been, we have only to look at the many swings in sentiment in 2022. Markets fell from their all-time highs at the beginning of the year due to concerns that the Federal Reserve wasn’t reacting quickly enough to inflation. Markets then rallied in March when the Fed began to raise rates, only to then plummet into bear market territory as the inflation data worsened. Markets then rallied 17% from June to August in hopes that the Fed would slow its rate hikes, for fear of a recession. These hopes were dashed when Fed Chair Powell doubled down on the inflation battle by maintaining 75 basis point hikes, causing markets to give up their gains. Markets then jumped 8% in October and 5% in November, some of the best monthly gains in history, before once again stalling out.

Despite these historic shifts in the economy and markets over the past year, the principles of long-term investing haven’t changed. Staying disciplined, diversified and focused on longer time horizons is more important than ever. For some, it may feel as if markets can’t catch a break, but this is how it felt in March of 2020 before the rapid recovery, in 2008 before a decade-long expansion, and during countless other times across history.

Insights from 2022 that can help to maintain a long-term perspective in 2023

1. The historic surge in interest rates impacted both stocks and bonds.

Beneath the headlines and day-to-day market noise, one key factor drove markets: the surge in interest rates broke their 40-year declining trend. Since the late 1980s, falling rates have helped to boost both stock and bond prices. Over the past year, the jump in inflation pushed nominal rates higher and forced the Fed to hike policy rates. This led to declines across asset classes at the same time.

While this has created challenges for diversification, there is also reason for optimism. Most inflation measures are showing signs of easing, even if they are still elevated. This has allowed interest rates to settle back down in recent months even as the Fed continues to hike rates.

While still highly uncertain, most economists expect inflation and rates to stabilize over the next year rather than repeat the patterns of 2022.

2. The Fed raised rates at a historically fast pace.

The Fed hiked rates across seven consecutive meetings in 2022 including four 75 basis point hikes in a row. At a range of 4.25% to 4.50%, the fed funds rate is now the highest since the housing bubble prior to 2008. In its communication, the Fed has remained committed to raising rates further and keeping them higher for longer in order to fight inflation.

Current market-based measures suggest that the Fed could push policy rates to 5% by mid-2023. The central bank continues to face a balancing act between inflation and a possible recession. Despite two negative quarters of GDP growth in the first half of 2022, few consider the economy to be in recession already.

Instead, some forecasters expect the U.S. and many other countries to experience a recession in 2023, although most also expect it to be shallow. Slowing growth may mean that the Fed takes its foot off the brake pedal sooner.

Regardless, markets tend to recover ahead of the broader economy.  They are, after all, forward looking so even if short-term economic data is not yet rosy the markets will typically bounce upward if expecting to emerge from a shallow recession.

3. Inflation reached 40-year highs but has improved.

While inflation has not been “transitory,” it may still be “episodic.” This is because the factors that drove these financial shocks were mostly one-time events. Many of these are already fading as supply chains have improved, energy prices have fallen, and rents have eased. Still, the labor market remains extremely tight and wage pressures could fuel prices that remain higher for longer.

At this point, the direction of inflation may matter to markets more than the level. Investors have been eager to see signs of improvement across both headline and core inflation measures, and good news has been priced in rapidly. There are reasons to expect better inflation numbers over the course of 2023.

4. The rallies in tech, growth and pandemic-era stocks have reversed

The past year also experienced a reversal of the rallies in 2020 and 2021 that were concentrated in the tech sector, Growth style, and pandemic-era stocks. For the first time in years, Value outperformed Growth as former high-flying parts of the market retreated from exuberant highs as the economy slowed and interest rates jumped.

The key takeaway for investors is that diversifying across all parts of the market is important. This includes different size categories (large, mid and small caps), styles (Value and Growth), geographies (U.S., developed markets and emerging markets), sectors, and more.

5. History shows that bear markets eventually recover when it’s least expected.

Though 2022 was challenging, history shows that markets can turn around when investors least expect it. While it can take two years for the average bear market to fully recover, it’s difficult if not impossible to predict when the inflection point will occur.

Many investors have wished that they could go back to mid-2020 or 2008 and jumped back into the market. If research and history tell us anything, it’s that it’s better and easier to simply stay invested than to try to time the market. This could be true again in 2023, just as it was during previous bear market cycles.

While we cannot control, nor predict, the markets we do see signs of recovery and strength.  As always we are monitoring the economy and markets for both threats and opportunities, and will adapt accordingly to meet your long-term planning goals.

The Dow Jones Industrial Average is an unmanaged, price-weighted index of 30 blue-chip stocks. You cannot directly invest in this index.

The NASDAQ Composite Index is an unmanaged, market-weighted index of all over the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in this index.

The MSCI EAFE Index (Europe, Australasia, Far East) is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.

The Bloomberg US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.