US Annual (2022) Recap: Dow (8.78%), S&P (19.44%), Nasdaq (33.10%), Russell 2000 (21.56%)
Major US market indices were down in 2022, with the S&P and Nasdaq logging their worst calendar years since 2008. The S&P hit a fresh all-time closing high of 4796.56 on 3-Jan before sliding, breaking into bear-market territory in June and hitting a low closing price of 3577.03 on 12-Oct. Treasuries were historically weak amid the Fed's rapid rate hikes and looming fears of a coming recession, with a lot of attention on an extremely inverted yield curve; the 2/10 spread hit its most negative level in more than 40 years. The 2Y's yield rose from 0.73% at the start of the year to 4.64% in early November before pulling back somewhat; the 10Y opened the year at 1.51% before topping at 4.23% in late October. Dollar strength was a big factor weighing on equities this year, with the DXY rising 7.9% in 2022 (its best year since 2015). Gold logged a minor 0.1% loss for the year, crossing above $2,000/oz in March but then sliding for much of the remainder. Oil was a big focus this year amid much concern for the impacts of the Russian invasion of Ukraine, economic normalization in China, and fears about slowing global demand. But despite a wealth of stimuli, WTI logged only a moderate gain for the year, settling up 6.71%. (FactSet)
The inflationary backdrop weighed on Big Tech. Semis, cloudsoftware, and unprofitable tech weighed as well. There was significant weakness throughout the EV space. Homebuilders struggled in an environment of rapidly increasing mortgage rates. Department stores and specialty retailers faced concerns about consumer-spending shifts, bloated inventories, and margin pressures. Media, apparel, REITs, exchanges, and airlines were some of the year's other laggards. Larger-cap banks had a challenging year, but regionals fared somewhat better. To the upside, energy was far and away the strongest sector in a year replete with both supply and demand worries. Integrateds, oil-services firms, E&Ps, and refiners were broadly higher. There were few other standout groups, but ag machinery, fertilizers, A&D, P&C insurance, biotech, pharma, managed care, and food were among the stronger areas. (FactSet)
Surging inflation was an overarching concern this year, both for the obvious pressures on consumers and businesses but also in terms of the aggressive policy response from global central banks. Headline CPI reached a 9.0% y/y pace in June (its highest level since 1981) before beginning to taper off to a 7.1% y/y rise in November's report. Core-price growth peaked more recently, rising 6.7% y/y in September, then moving down to 6.0% y/y in November. Energy was a big driver of the headline rise due to big increases in the price of oil and gas, with the Ukraine invasion a big factor. But there were also significant increases in food prices across the year, and policymakers voiced much concern about elevated shelter inflation. Producer-price inflation was similarly high, with headline PPI spending four months above an 11% y/y pace from March through June (though tailing down to just 7.4% y/y in November). All through the year, policymakers fielded questions about whether the recent experience with high inflation might mean consumers' expectations could become unanchored. Fed officials acknowledged the risk of this but generally said there were not seeing that scenario play out; and indeed various surveys showed short-term inflation expectations coming down through the second half (though consumer uncertainties remained elevated). (FactSet)
Worries about a Fed liftoff and balance-sheet runoff came to front and center early in the year. The 5-Jan release of the December 2021 FOMC minutes showed almost all participants in favor of balance-sheet normalization and showed some members' willingness to increase the Fed funds rate sooner or at a faster pace than had been expected. This was eventually manifested in a 25bp hike in March and a further 50bp in May, with the latter meeting also seeing an announcement that balance-sheet runoff would begin in June. That month's meeting began a series of four straight 75bp hikes as the Fed continued to look for signs of an inflection in the inflation data (and with Fed voices starting to push back against market hopes for a quick "pivot" that would move rates back down). Indeed, the dominant Fedspeak theme for the remainder of the year was the "higher for longer" mantra, as officials worked to shape market expectations-particularly in the face of uncooperative inflation and labor-market data as well as rising worries about potential economic damage from the higher-rate campaign. By year's end, Fed members had signaled that a slowdown in the pace of hikes was warranted, often discussing the long and variable lags between policy moves and the data. FedWatch currently notes market expectations for two more 25bp hikes before a multi-month Fed pause, with some sense it could begin to pare rates late in 2023. (FactSet)
The year's multiple pressures fed into persistent concerns about the economy tipping into a recession. The Fed's commitment to a "higher for longer" policy path remains a key worry, though policymakers have asserted they are hoping for a "softish landing" (though they concede the path to that outcome may be narrow). There have been anxieties about the potential signaling effects of the yield curve. The 2Y/10Y Treasury yield spread was consistently negative from 5-Jul onwards, inverting by 84bp on 6-Dec, its most deeply negative level since 1981. The 3M/10Y curve also inverted in November and remains far into negative territory. And while one of the Fed's primary goals has been to bring inflation back down to the 2% long-term target, it is unclear how long this effort may take. Meanwhile, companies will continue to have to cope with wage pressures, higher input pricing, and possible demand fluctuations should the US consumer become less resilient. The confluence of these factors has fed into analyst concerns that consensus S&P earnings for 2023 may be too high and may have farther to come down. Amid all this, investor sentiment remains extremely depressed, while corporate executives have been slowing hiring, announcing layoffs, and working to cut costs. (FactSet)
Elsewhere in the newsflow:
China was a major factor for the market this year, on several fronts. Beijing's seemingly rock-solid commitment to its "zero-Covid" approach left the country open to the type of shutdowns seen in the early days of the pandemic, and in fact much of Shanghai was closed in the spring in an attempt to quell an outbreak. But by the fall, officials had backed away from this approach, which was seen as a bullish development toward normalization of a major world market (though at year's end the country is grappling with surging new-case numbers). There was also close attention on the government's proposals for economic policy support, including a well-received announcement of a $150B fund for its beleaguered property sector. Also, many US-listed China stocks struggled this year against fears they could be delisted, though developments giving US regulators broader access to audited financial records appears to have averted this possibility. (FactSet)
Russia launched an invasion of Ukraine in February. While this enterprise saw some quick gains, Ukrainian resistance was stiff and, with the help of significant financial and materiel support from the West, was eventually able to mount a counteroffensive. While the war presented much headline risk in the early days (and at times when Russia's Putin made remarks about possible nuclear responses), it has ceased to be a significant day-to-day concern for the market. At year's end, the situation has largely ground down to a stalemate; and while peace talks are occasionally mooted, the likelihood of a near-term diplomatic solutions seems quite remote. (FactSet)
Oil came off a strong year in 2021, when WTI rose ~55% amid broad trends toward economic normalization. OPEC+ even began the year by boosting its output targets. Russia's invasion of Ukraine in February and the resulting international sanctions scrambled the global oil trade and saw WTI trade as high as $130/barrel in early March. But concerns about Chinese demand and the global economic trajectory amid broad rate hikes served to depress crude, with lingering uncertainties being cited by OPEC+ as a key factor behind its October decision to cut its targets by 2M bpd. In the US, there was vigorous debate about the cause of and remedy for spiking gas prices, with AAA logging a high of $5.02/gal for regular gas on 14-Jun. But by the end of 2022, the retreat in oil prices had contributed to domestic gas prices dropping to their lowest levels since summer 2021. (FactSet)
The US housing market was extraordinarily challenged after some notable strength during the pandemic. Rapidly rising mortgage rates were a major factor, though tight inventories and high homes prices were no help. The MBA 30Y mortgage rate topped out at 7.16% in late October, the highest level in more than two decades, before retreating to 6.34% near the close of the year (after ending 2021 at 3.31%). Homebuilder confidence hit its lowest mark since June 2012 (excluding the pandemic low), November housing starts were down 16.4% y/y, and existing-home sales saw their longest streak of monthly declines since 1999. (FactSet)
Cryptocurrencies descended into a so-called "crypto winter" this year, with Bitcoin slumping for much of the year and bottoming out near $15K before finding some stability (in contrast to its all-time high above $68K in November 2021). The risk-off atmosphere amid the Fed's rate hikes has been cited as a factor, but hopes for broader adoption of the asset class have also been hamstrung by several high-profile crises, particularly the collapse of the Terra "stablecoin" in May, the downfall of crypto lender Celsius in June, and the dramatic breakdown of Sam Bankman-Fried's FTX empire this fall. It remains to be seen how and in what form some of the crypto market's aspirations for decentralized finance may survive. (FactSet)
The 2022 US congressional midterm elections produced more of a whimper than a bang. Given economic unease, high gas and food prices, low polling numbers for the Biden administration, and historical trends, there was a sense that control of both houses of Congress could pass to Republicans this year. In actuality, the forecast "red wave" did not appear, with the GOP only able to gain a small majority in the House (while the Democrats widened their slim control over the Senate). In general, this was considered a bullish development in the sense that a still-divided government was unlikely to generate broad new spending plans or wide-ranging reforms. (FactSet)
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