December Market Recap
Unfortunately, for both stock and bond investors, 2022 ended much like it began.
The S&P 500 fell 5.9% in December and 19.4% in the full calendar year, the benchmark’s worst annual performance since 2008. The NASDAQ dropped 8.7% in December and 33.1% for the year. The NASDAQ’s total return had been positive for 13 consecutive years. The Dow Jones Industrial Average, as it had often done in 2022, lost considerably less.
The last 12 months also brought historically bad returns for bonds. The 10-year US Treasury yield started the year at 1.5% and finished at 3.9%. With interest rates climbing, bond prices stumbled steadily downhill. The Bloomberg US Aggregate Bond index (which tracks the performance of investment-grade bonds) fell 13% in 2022. In its 45 years of existence, the benchmark had never fallen as much as 3% in a single year.
All 11 equity sectors in the S&P 500 were negative in December. Utilities (-0.8%) proved most resilient to the selling. Health Care (-2.1%) also outperformed in relative terms. Consumer Discretionary (-11.3%) and Technology (-8.4%) suffered the largest monthly losses. For calendar year 2022, Energy (+59%) was the only sector to finish positive.
One nugget of good news from last month was the December 13 inflation report revealing the Consumer Price Index (CPI) fell to 7.1% year-over-year. Peak inflation (9.1% in June 2022) is clearly in the rearview mirror. The next big question becomes whether it falls rapidly enough for the Federal Reserve to eliminate future rate hikes.
On December 14, the Fed raised interest rates by 0.50%. It was the seventh increase in 2022 and although smaller than the previous four rate hikes (0.75% each), the new Fed Funds rate (officially: 4.25 – 4.50%) is the highest in 15 years. Current forecasts released by the Fed suggest the rate will reach 5.0 – 5.25% by the end of 2023, signaling another 0.75% of rate hikes to come.
We have our doubts that the Fed will stick to such aggressive monetary policy, especially if US economic growth flatlines or turns negative (leading to a recession) as many suggest could happen in the second half of 2023. For now, however, a hawkish Jerome Powell has convinced financial markets that the “Fedwinds” will remain strong in the near-term.
Small-cap US companies did not differ much from large-cap stocks in December. The Russell 2000 index declined 6.6% last month and 21.6% for the calendar year. Value stocks, however, significantly outperformed Growth. The Russell 1000 Value index dropped 10% in 2022 compared to a 30% loss for the Russell 1000 Growth.
Thanks to a softening of the US dollar in the final few months, international equities posted 2022 performance that was similar or better than US stocks. Non-US Developed Markets fell 1.8% in December and 12.1% for the calendar year. Emerging Market equities lost 2.7% in December and 18.6% for the year.
A loosening of China’s zero-COVID policy announced last month should provide some oxygen to the world’s second-largest economy, which was smothered by government regulations for much of last year. China’s largest stock index, in anticipation of the changes, rallied for five consecutive weeks leading up to the announcement.
Commodities offered a wide range of investment returns in 2022. Corn and soybeans gained 14% each for the calendar year. Crude oil and gasoline prices increased 7-11%. Gold was flat. Other metals like copper and aluminum lost 15-16%. Lumber prices were down 67%.
The rate on a 30-year fixed rate mortgage was 6.4% at year-end, the highest to end any year since 2001. The 3.3% increase in mortgage rates during 2022 is the largest since the data began being tracked in 1971.
With higher rates comes less affordability and declines in home prices. The most recent housing data (as of October 31) showed that US home prices fell for the fourth consecutive month. San Francisco (-11%) and Seattle (-8.6%) properties have declined the most from their all-time highs. Chicago (-0.9%), Cleveland (-1%), Atlanta (-1.4%), and Minneapolis (-1.8%) have fallen the least.
Investment Advice offered through Marks Group Wealth Management, a Registered Investment Advisor.
Marks Group Wealth Management performs in-house analysis on companies. Statistical information on mentioned companies is obtained from company reports, news releases and SEC filings. The information set forth herein has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be a complete analysis of the securities, companies or industries involved. Opinions expressed herein are subject to change without notice. Additional information is available upon request.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments and strategies may be appropriate for you, consult with us at Marks Group Wealth Management or another trusted investment adviser. Mention of individual equities in this commentary are for informational purposes only and are not intended to represent a recommendation.
Stock investing involves market risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. International and emerging market investing involves special risks such as currency fluctuation and political instability. These risks are often heightened for investments in emerging markets. No strategy assures success or protects against loss. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.