The Good, the Bad & the Ugly ~ 2022 in Review

After two tumultuous years, the global economy started 2022 on what appeared to be solid footing. Then came the war in Ukraine, followed by a market decline into Bear territory. Both stocks and bonds fell as a result of stubbornly high inflation, geopolitical tensions, and a series of aggressive rate hikes by the Federal Reserve. We escaped a recession in 2022, but are we safe from the economy declining further in 2023?

Let’s look back at the good, the bad & the ugly highlights of 2022.

The Good

  • Supply chain issues that plagued the U.S. economy for much of 2020 and 2021 began to ease throughout the year.

  • Despite higher rates and slowing economic activity, both corporate and consumer credit markets saw little damage in 2022.

  • By year end, inflationary pressure began to ease as Fed rate hikes began to bite into demand.

  • Industry sectors within the S&P 500 that were positive for the year were Energy (+65.7%) and Utilities (+1.6%).

The Bad

  • Inflation remained persistent as consumers shifted their purchasing preferences from goods to services.

  • The tight labor market, one of the lingering effects of the pandemic, remained constrained as the shortage of available workers showed little improvement and the cost to hire and/or retain workers became costly to employers. 

  • The Federal Reserve began hiking rates in March 2022 and continued to raise rates at each of its meetings throughout the year. In total, the Board raised the rate on its target Federal Funds rate by 450bps, moving its policy stance from easy to somewhat restrictive by year end. Short-term interest rates, as measured by the 2-yr U.S. Treasury saw its rate rise by 3.70% from 0.73% to 4.43% on December 31, while the 10-yr U.S. Treasury rose 2.37% from 1.51% to 3.88% at year end.

  • Food and shelter costs remained elevated through the end of 2022.

  • International stocks outperformed domestic equities on a relative basis with the MSCI EAFE** falling 14.0% and the S&P 500 falling 18.1%.

  • Bonds were not immune to the negative markets. As the Federal Reserve increased its target Federal Funds rate throughout the year, bond prices fell. Much of the damage was to the longer-end of the yield curve where the greatest price declines were felt. Investors who maintained a shorter duration portfolio were rewarded on a relative basis. The Bloomberg U.S. Aggregate Bond Index declined 13.0% in 2022, with the corporate credit segment declining 15.3%.  However, when you break out the various maturity buckets within the aggregate, shorter maturity corporate bonds only declined 5.5%, while bonds with a maturity of greater than 10 years fell 25.6%. 

The Ugly

  • Rising inflation was the primary concern in 2022 as the U.S. Consumer Price Index (CPI) seemed to reach a peak in June at 9.1% on a year-over-year basis, the highest level since 1981. The effects were felt in food, energy, shelter costs and used cars, thereby hitting everyday life for consumers. 

  • Domestic small caps fell just over 20% for the year and the tech-heavy NASDAQ experienced its worst year since 2008, declining 32.5%. It was the first time that the NASDAQ turned in negative performance for four consecutive quarters. 

  • The biggest detractors in 2022 came from Communication Services (-39.9%), Consumer Discretionary (-37.0%) and Information Technology (-28.2%).

Looking forward to 2023
No one has a crystal ball to accurately predict how the market will perform in the coming year, as was proven last year when Russia invaded the Ukraine and set a chain of events in motion that were unexpected just a couple months before. While we can look to history and economic indicators to reasonably frame what we can expect, we also assess all of the various factors that can impact the global economy and markets that might be unanticipated.

We are planning for additional, but declining, volatility in the first half of 2023 as we await the end of the Fed’s rate hiking cycle, the lagging effects of the rate hikes, and a reduction in inflation. We will be focused on any indications our economy is headed into a recession or signs the Fed has raised rates too far. We will continue to invest in high-quality stocks, focusing on defensive sectors that provide long-term value for our clients. Additionally, we review our equity allocations on an ongoing basis and make tactical changes as conditions warrant to  best position your portfolios for resiliency in a volatile market and for long-term growth across market cycles.

If you have questions about your portfolio or would like to discuss any shifts in your risk/reward tolerance, please contact your advisor to schedule a meeting.

*A bear market is one where the market declines 20% or more over at least a two-month period of time. Bear markets indicate a downward trend in the market and can be triggered by a market correction where the market drops between 10% to 20% in a short period of time. 

**The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.

Rebecca McClure