December 2022 / Year End Market Commentary
Happy New Year!
We hope you had a wonderful holiday season and are having a wonderful start to your New Year! Our household was so excited to celebrate the Christmas holiday without illness this year and it couldn’t have been a more peacefully quiet holiday. We were able to make the trek up to Pennsylvania on Christmas eve to see family and enjoyed safe travels back to enjoy some more time with family in Virginia. With all the excitement (not meant in the positive sense) of 2022, I don’t think I have ever been more excited to “turn the page”. As we come out of one of the most historically unpleasant years for investors, we will cover both the summary of 2022 and the 2023 outlook. If you choose to not read a month end report, this would be the one.
Well, December brought no holiday gifts for the markets or the economy and rather followed the underlying theme of the entire calendar year with the S&P500 ending the month down -5.90% and the already heavily beaten down Nasdaq Index finishing the month down -8.73%. The markets faced several challenges in 2022 including high inflation (reaching a 40 year high in June), historic central bank policy (quickest and largest tightening cycle since the late 1990’s), the war in Ukraine and Covid lockdowns in China. Inflation certainly was the leading factor which prompted the Federal Reserve and its global central bank peers to aggressively raise interest rates, which substantially caused stocks and bonds to trade lower.
There was no place to hide from the rapidly tightening policy as the S&P500 Index finished the year down -19.44% and the Nasdaq woefully ended at -33.10%. These were the worst performances for the major market indexes since 2008 but in that year the bond provided somewhere to hide unlike 2022. If the figures above don’t feel dismal enough, the U.S. Bond Aggregate Index had its worst year since it’s inception year of 1976, ending the year down -13.1%. The lack of safe haven’s was widely apparent as we moved throughout the year.
With the Fed tightening throughout the year to tamp down inflation, consumer spending and employment data remained strong which only acted to create a teeter totter of headlines, news stories and market volatility. As the debate on whether the Federal Reserve can significantly reduce inflation but keep the US Economy out of full-blown recession, left one area horribly hit. The technology sector, which had its worst year since 2000-2001 because of their sensitivity to interest rates and growth slowdowns. Here is how some of the bigger names faired in 2022
Apple ended 2022 down -27%
Microsoft ended 2022 down -29%
Google ended 2022 down -39%
Amazon ended 2022 down -50%
Nvidia ended 2022 down -50%
PayPal ended 2022 down -59%
Facebook ended 2022 down -64%
Tesla ended 2022 down -68%
As I outlined above, we have ended 2022 with pessimism as the predominant stance, it couldn’t be a better time to “turn the page” to even the unknowns of 2023.
Everyone’s focus will be on recession worries vs. the potential of a soft landing. As we begin 2023, the data indicates the U.S. economy has withstood tightening thus far, but the real test will come as the cumulative impact of higher interest rates becomes clearer. While a recession is not a foregone conclusion, it is guaranteed that the economy will be tested in 2023. As I have written over the last 3 years, we are working through a time in which we do not have an easily referenced historical period to compare too. The debate being had around offices, kitchen tables or maybe just in my house, is has the Fed made a large enough impact on the economy and inflation to change its course. The Leading Economic Index has decreased every month since March and indicates that the economy is consistently slowing after a period of strong growth during the pandemic. This index includes 10 components such as new home building permits, manufacturing hours worked and new capital goods orders. All eyes will begin the year with the Consumer Price Index data being released on January 12th and we will get a good read on the economic slowdown on January 26th with the release of 4th quarter GDP (Gross Domestic Product) print. The first month of 2023 will end with the Federal Reserve beginning it’s 2-day Open Market committee meetings and our expectations will be to see a reduction in pace on interest rate changes.
Every year brings its own challenges, but over time investors have continued to be rewarded for a disciplined long-term approach and ignoring period cycles of discomfort.