Market Commentary December 31, 2022
The fourth quarter of 2022 provided some relief for investors with both US and international stocks posting their only full quarter of positive returns for the year. The S&P 500 finished up 7.1% for the quarter while ending the year down 19.4%. International stocks saw a strong rally in the quarter as the MSCI EAFE was up 17.0%, and finished the year down 16.8%. 2022 was the first year since 2017 when international stocks outperformed the S&P 500.
In the fixed income markets, the Bloomberg US Intermediate Term Corporate Bond Index also increased during the quarter, ending up 2.7% while finishing down 9.4% for the year.
For stocks, 2022 was the worst year for performance in the S&P 500 since 2008 when the index contracted 38%. 2022 was also only the third year of contraction for the S&P 500 since 2008. International stocks also saw their worst year since 2008 when the MSCI EAFE was down over 45%.
As we’ve mentioned in previous notes, inflation has been the predominant factor driving equity and bond markets in the United States. To combat inflation the Federal Reserve embarked on a rate hike cycle that saw the Fed Funds policy rate increase from essentially zero to 4.5% by the end of the year. These aggressive hikes in rates appear to have had an effect as numerous gauges of inflation (both headline CPI and PCE, and core CPI and PCE which excludes food and energy costs) peaked and then pulled back from highs.
Another indicator of the effectiveness of the Fed’s interest rate policy is the labor market both in the number of jobs/unemployment rate and wage growth. Recent wage growth data from the Atlanta Fed may indicate wage growth may have peaked as well. On the jobs side, the unemployment rate remains low at 3.7%, however, the number of job openings has been declining since its peak in April of 2022 and the number of people quitting their jobs in 2022 declined throughout the year.
A couple of new terms many participants in the financial markets will be focusing on, and you likely have already seen in the news is “pause” and “soft landing.” “Pause” refers to the potential for the Federal Reserve to pause their interest rate hikes as they digest the economic data (inflation, jobs, GDP growth, etc) and determine future courses of action. While a “soft landing” speaks to hopes that the impact on the economy from higher interest rates and a tightening labor market doesn’t drive the country into a recession and instead results in the economy gently reaching a level of activity that tames inflation back to the Federal Reserve’s long-term 2% target. In our view, the Federal Reserve has a challenge ahead of it.
One of the things we look at when thinking about the health of the markets is what earnings, or profitability and growth expectations look like for stocks. As of December 30th, 2022 I/B/E/S data from Refinitiv, which compiles earnings estimates by Wall Street analysts, shows that earnings growth for the S&P 500 is expected to be 4.4% in 2023. It's important to note that these estimates can and do frequently change. For example, expectations for 2023 earnings growth have come down significantly from 9.8% in April 2022. It is certainly possible that current estimates are too high and may come down more, subsequently impacting stock prices.
2022 marked a historic year for bonds and rate markets worldwide. Most major US Bond Indexes were down by more than 10%. To contrast, going back to 1976 (therefore encompassing the highly inflationary/high rate environment of the late 70s/early 80s) – the Bloomberg US Aggregate Index had not generated an annual return worse than -4%. Over that same interval, ’22 was only the fifth time bonds had gone negative from an index perspective; historic indeed. Q4 reached new lows before rallying the last couple of months of the year – so perhaps it could have been a deeper retraction still. Regardless, our continual focus on keeping our client portfolios shorter in duration greatly helped to insulate our client's bond portfolios from the worst of the global sell off. Limiting interest rate risk in portfolios, which we always endeavor to do, was beneficial in 2022.
As always, if you have questions regarding your portfolio, please consult your financial advisor. We appreciate your continued trust in SG Long Financial and look forward to working with you in the future.
Rob Richardson, CFA
Director of Research
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