- 2022 was a challenging year for investors as stocks and bonds fell in value.
- The US economy is slowing from rising yields as the Federal Reserve continues to target high inflation.
- Bond yields are the highest we have seen in years and if inflation gets under control, 2023 could be a more normal year for fixed income.
Investors didn’t have a whole lot to feel cheery about in 2022. A war between the Ukraine and Russia scrambled energy markets, inflation hit a forty year high, and interest rates soared. The delicate US economy wobbled during the year, as repercussions from supply chain disruptions continued to reverberate. Both stocks and bonds had one of their worst years in decades after years of easy money abruptly ended as the Federal Reserve aggressively targeted rising prices.
Among the major US indexes, the Dow Jones Industrial Average was the best performer with a 6.86% loss for the year. High quality companies with consistent earnings outperformed speculative growth stocks. The S&P500 dropped 18.11% while the tech-heavy NASDAQ lost 32.54% after accounting for dividends. Energy stocks were the darlings of 2022 gaining over 65% while most of the other major sectors fell. Value stocks fared better than their growth counterparts, after several years of underperformance. International stocks saw gains towards the end of the year as the strong dollar began to reverse course against most major currencies. The Bloomberg US Aggregate Bond Index saw its worst year since it’s 1976 inception as it lost 13.01% amid rising yields. Inflation has started to slow moving into 2023. If it continues to drop, we could see a more normal year for the investment grade bond market. Current yields are the most attractive we have seen in years.
Many economists expect the US to enter a recession this year as inflation and higher interest rates dampen economic activity. However, the labor market is still tight, with unemployment at 3.7%. Past recessions have seen much higher levels of unemployment, suggesting this recession may be mild and short lived. A resolution to the conflict in Ukraine and a reduction in wage inflation could cause the US economy to avoid a recession but growth in the next several quarters will likely be below trend levels. While the equity market may continue to be choppy heading into the new year, it is important to remember that stocks are a leading economic indicator and tend to bottom well before the economy starts to rebound. Trying to time the market is a risky endeavor and best suited for short-term traders. Long-term investors tend to be rewarded with patience and well-diversified portfolios. Happy New Year!
Sources: Morningstar Direct, Wall Street Journal, JPMorgan, Morgan Stanley