Morning Market Commentary Q4 2022
In an otherwise volatile and ugly year, the fourth quarter of 2022 turned out to be a pleasant surprise. Sentiment turned optimistic mainly led by better-than-expected corporate earnings and Year-over-Year inflation rates coming down from a peak of 9.1% in June 2022.
S&P, Dow, and NASDAQ
The S&P 500 was able to climb higher by 7.1% for the quarter, which pared its loss down to -19.4% for the year. The Dow Jones Industrial Average had its best quarter since 1998, gaining 15.4%, which gave it a capacitively modest -8.8% loss for the year. The tech-heavy NASDAQ, however, was not as fortunate as it continued to fall posting -1.0% for the quarter which pushed the annual decline to -33.1%. 2022 was the fourth worst year for the stock market since the Great Depression.
Moving from Growth to Value Investments
One of the main stories for the year has been the shift from growth investments to value investments as the air has continued to come out of the tech bubble that has been inflating over the past 10-15 years since the 2008 Financial Crisis. The two funds that we monitor that follow these sectors are iShares S&P 500 Growth ETF (IVW) and the iShares S&P 500 Value ETF (IVE). The S&P 500 Growth ETF closed lower by -30.1% in 2022 while the S&P 500 Value ETF was down just -7.38%. This was mainly due to recessionary fears, which increased interest rates and drove investors into “safer” investments, while they continued to wait for the market to cool on inflation and ripple effects of the Covid-19 Pandemic.
The Fed & Inflation
As many investors continued to find their footing during the 2022 trading year, the Federal Reserve increased the Fed Funds rate at a record speed to try and combat rising inflation. In March 2022, the Fed Funds rate was 0.0% and it ended the year at 4.25%. This large increase throughout the year brought the worst annual return for the bond market since the 1920s. Though the bond market was crushed in 2022, it also created opportunities for many of our clients looking for Fixed Income.
Rising Interest Rates
Since the 2008 Financial Crisis, the Federal Reserve has kept interest rates practically at 0.0%. This created a trading environment where there were very few alternatives to investing in stocks. This has changed for the first time since 2008. We can now invest in US Treasuries with 4.75% yields and find some Money Market yields with rates as high as 4.25%. With the stock market’s continued volatility, investors have found short-term fixed-income investments to be a place to hide while we wait for the market to cool.
January 2023 and Onward
Looking forward to 2023, we will continue to monitor Inflation as the reports are announced monthly. As inflation continues to moderate, we should see the Federal Reserve slow down on its rate hikes and the bond market should begin to stabilize. The current yield curve remains inverted which means that shorter-term bonds are yielding more than longer-term bonds. This has historically been a leading indicator of a Recession. Some may argue that we saw the recession earlier in 2022 when we had two negative quarters of growth, which is the textbook definition of an economic recession.
Some say there is more to come, and others argue that with employment remaining robust, there may be no recession coming, and if it does, it will be short and shallow. One thing that we can all agree on is that it is nice to put 2022 in the rear-view mirror. All eyes will be on the opening of 2023. Historically, the first five days of trading in the New Year can dictate how the year might go. When stocks finish the first five days higher, the S&P 500 has been positive more than 80% of the time at year-end. There is an old saying on Wall Street…”As goes January…so goes the year.”
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