Despite a 4th Quarter rally (the S&P finished up 7.1%), major market indices finished the year down reflecting surging inflation, Fed monetary policy, economic fears, and geopolitical events that included the Russian invasion of Ukraine and China’s Covid-19 policies. The S&P 500 finished the year down 19.4% and the Nasdaq was down 33.1% as interest rate hikes particularly weighed on growth stocks. The difficult year wasn’t limited to equities as the Bloomberg US Aggregate Bond index finished 2022 down 13%. Bonds were under pressure for much of the year as the Fed hiked rates sooner and at a faster pace than investors expected to combat stubborn inflation. The 10-year U.S. Treasury yield nearly touched 4.25% in late October and ended the year at 3.88%, 2.37% higher than where it started 2022.
Inflation was also the dominant theme when digging deeper into U.S. stock returns as more inflation sensitive small cap stocks underperformed large cap stocks in 4Q22 and throughout 2022, while value stocks (typically less inflation sensitive) broadly outpaced blend and growth stocks in 4Q22 and over 2022.
International developed and emerging markets indices lagged U.S. indices for much of 2022 reflecting geopolitical events, aggressive Fed rate hikes, and a surging U.S. dollar. However, international and emerging indices had a very strong close to 2022 (up 17.3% and 9.8% respectively in 4Q22) as the U.S. dollar rapidly weakened and China started to unwind it’s “zero-Covid” policies, resulting in the MSCI EAFE index outperforming the S&P and the MSCI EM index nearly matching the S&P for the year.
While more volatility could be ahead and several questions remain unknown at the beginning of 2023, many of which revolve around a potential recession, we also believe this is a time of great opportunity. Signs that inflation has peaked and the Fed’s rate hikes are drawing closer to an end are becoming more abundant, there are areas of the equity market with attractive valuations, and a variety of fixed income and traditional savings vehicles are paying attractive rates of return. We appreciate our clients’ resolve throughout the past year and believe they are well equipped to handle whatever 2023 throws their way. We advocate taking a long-term view by maintaining a balanced and well-diversified investment approach. We want to leave you with a quote from famous value investor Shelby Cullom Davis: “You make most of your money in a bear market, you just don’t realize it at the time.”
| Index | 4th Quarter 2022 | Year-to-Date |
| Dow Jones Industrial Average | 15.4% | -8.8% |
| S&P 500 | 7.1% | -19.4% |
| Russell 2000 | 6.2% | -20.4% |
| Bloomberg Barclays U.S. Agg Bond | 1.9% | -13.0% |
| MSCI EAFE Index | 17.3% | -14.5% |
| MSCI EM Index | 9.80% | -19.7% |
Sources: FactSet
Data as of December 31, 2022. Past performance cannot guarantee future results.
Tags: Market Recap