The market began the 4th quarter optimistically, with the S&P 500 producing positive returns in October and November. But December turned negative, wrapping a difficult 2022 for both stocks and bonds.
The main storyline driving markets this year has been soaring inflation and the Fed’s aggressive response to tame it. The federal funds rate began the year at just 0.25% and increased to 4.50%. This was the fastest increase in 40 years, which directly coincides with the highest levels of inflation that we’ve had in 40 years. Fed Chairman Jerome Powell shared in a December news conference that while recent months have shown a welcome reduction in the pace of inflation, “It will take substantially more evidence to have confidence that inflation is on a sustained downward path.”
The S&P 500 finished the year with a loss of 19%, marking the most significant calendar year drop since 2008.
The tech-heavy Nasdaq Composite index fared even worse, falling by 34% for the year. High-profile, tech-related companies such as Amazon, Tesla, Facebook, and Meta (Facebook), who benefited the most during the Covid-19 lockdowns, suffered the most this year, all falling by at least 50%. Big market swings mostly hinged on either the publication of new inflation data or Fed interest rate increases, and this will likely continue into early 2023, with inflation remaining stubbornly high.
While a 20% decline in equity markets is painful, it’s not uncommon. On average, equity markets draw down by 20% or more every seven years. However, the fall of bonds in 2022 was truly historic. The Bloomberg Aggregate US Bond Index had its worst year since its inception in 1977.
Government bonds, in particular, suffered their 4th worst year going back to 1701; only the years following the South Sea Co. bubble burst (1721), the end of the U.S. Civil War (1865), and the end of World War I (1920) had the largest decline. Corporate bonds of all types, maturities, and credit ratings also suffered.
While uncertainty and challenges remain for our economy and markets, there are also signs of optimism. Inflation cooled in November to the lowest level of the year. We are far from the Fed’s 2% target but moving in the right direction. China’s pivot away from its zero Covid policy and economic reopening will be a tailwind to global growth. The U.S. unemployment rate remains low at 3.7%. And while consumers are showing signs of reduced spending, companies remain profitable. For the long-term investor, putting new money to work after a substantial fall in prices is generally a good thing.
Author: Jim Rambo, CFA | Research Team | Allegheny Financial Group | January 2023
The information included herein was obtained from sources which we believe reliable.
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