Quarterly Market Review 2022 Q4

2022 Q4 Market Snapshot

Macroeconomic forces were a dominant factor in the stock market volatility of 2022. Central to everything was stubbornly high inflation and the Fed's unprecedented response of aggressive interest rate hikes. Inflation was fueled by a number of factors, including global impacts of Russia's attack on Ukraine, a strong U.S. economy, and ongoing supply chain challenges. As a result, inflation persisted at higher levels longer than most investors (and the Fed) expected. The last three quarters of the year saw heightened volatility, and inflation will need to start coming down quickly for markets to begin turning around. The December inflation report just came out today at 6.5%, which was in line with expectations, resulting in a small bump in the stock market. Food prices were up 10.4%, which is certainly impactful, new vehicles up 5.9%, and airline fares up 28.5%, so there are still significant increases occurring. Core inflation, which excludes volatile food and energy prices, was up 5.7%, which is good to see. It will likely take some time for inflation rates to come down to normal levels, and we expect some volatility to continue in 2023. A few interesting data points looking back at 2022:

• The S&P 500 ended the year down 19.4%, marking the biggest annual loss since 2008.

• Bonds recorded the worst year in modern history, by far. A U.S. core bond index was down 12.9% for the year. Prior to this, the same index rarely had losses greater than 2%.

• The Federal Reserve raised interest rates seven times in 2022, brining the Federal Funds Rate from 0% in January to 4.25%-4.50% by the end of the year.

• The yield curve remains inverted, meaning the 2-year Treasury yield is higher than the 10-year Treasury yield, indicating expectations that the market is expecting a slowing economy in the future, with lower levels of inflation. 

  
  

Below is a snapshot of key top-line economic indicators:

Here is a market summary of fourth quarter 2022 returns:

U.S. Stocks

While Q4 returns were up 7.18% in Q4, bringing some relief for a painful year for the U.S. stock market, it was not enough to bounce back from the lowest point of the year in mid-October, when the market was down 24.9% from the beginning of the year.

International Stocks

Developed markets outside of the U.S. posted positive returns in Q4, and outperformed both U.S. and emerging markets.

Fixed Income

With the Fed raising interest rates aggressively throughout 2022 to combat decades-high inflation, the bond market experienced its highest yields in years, particularly with shorter-term bonds. Q4 brought positive returns to the bond market, but it was not enough to overcome the previous three negative quarters. 

As can be seen in the graph below, in June the yield curve inverted, meaning the 2-year Treasury yield exceeded the 10-year Treasury yield, and has remained inverted since. This typically indicates expectations of shorter-term risk and volatility.

The effective Federal Funds Rate target at the end of 2022 was 4.25%-4.50%, up from 0% at the start of the year. With the Fed signaling an abatement of rate increases in 2023, markets anticipate that the Fed will stop raising interest rates in early 2023, possibly starting to even lower rates by the end of the year. So, the silver lining for bond investors is higher bond yields, and a good possibility for a better year for bonds in 2023.