Twenty-twenty-two was not a year that went “according to plan” for markets. Leading in the Federal Reserve had been extremely dovish, emphasizing that there would be no rate hikes until 2023. Market focus remained on the “economic reopening trade,” which had undoubtedly taken equity valuations to extremes. However, Fed rhetoric turned on a dime when it became clear that historically high inflation did not look “transitory” after all. Their subsequent pivot towards one of the most hawkish policy stances in nearly 40-years effectively wrote the rest of the year’s bearish script.

The double surprises of war in Eastern Europe and China’s “Zero-Covid” policy only added to the malaise as a tug-of-war between a resolute Fed and a skeptical market elicited alternating waves of epic collapse and recovery. In the end, the S&P 500 Index’s annual decline of -18.2% (‘SPY’ ETF Proxy) was its fourth worst since inception in 1957 (Motley Fool, “The S&P 500 declined sharply last year…,” 1/15/23). Rising rates had an outsized impact on growth stocks, making it particularly rough sledding for technology stocks. And unlike many past bear markets, bonds also suffered with the Bloomberg Aggregate Bond Index finishing lower by -13.0% (‘AGG’), its worst retrace in nearly 100 years.

All that said, markets did end the year on a more positive note in the fourth quarter. US stocks (‘VTI’) regained +7.0%, while developed overseas equities leapt back a whopping +16.8% (‘VEA’) as the US Dollar took pause on the Fed’s reduced pace of increase. In fact, all our tracked global asset classes finished in the green for the quarter. Of particular interest, although commodities participated in the quarterly bounce, up +3.7% (‘DBC’), they still closed out the year at less than half of peak levels, hopefully boding well for future inflation reads.

Headed into 2023, the trading tone has improved but the macro-economic view remains uncertain. As usual, earnings will be especially important as to where markets go from here. Many reports, including home sales, manufacturing and services, have slowed substantially all while jobs numbers remain robust. However, strong jobs have led into recession before in the 1970s, so it would not be without precedent for a sharper slowdown to materialize (CNN, “Don’t be fooled, a recession really is coming…,” 1/13/23). However, China’s reopening could likewise buoy the global economy, and the possibility of a “soft landing” remains plausible.

If we do see a recession, it will certainly have been one of the most anticipated economic events in history. Speaking of which, the average historical recovery after years like 2022 has been +27.1%, with only two back-to-back down periods recorded since 1957. Time will tell what 2023 brings, but meanwhile we remain flexible in our views with an eye towards capital preservation until markets further stabilize or an all-clear catalyst presents itself.

Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.