The curtain has dropped on 2022 and what a challenging year it was. The old saw “as January goes so goes the year” was certainly true for 2022. The market surged to a new all-time high on the very first trading day of 2022, but early in January investors became increasingly concerned about inflation and the prospect of rising interest rates. The last two weeks of January brought the worst performance in several years. The S&P 500 Index gave back 6% of its value in the month of January.
The market rallied five times in 2022 and four of these recovery attempts failed with indexes declining to even lower lows. The fifth rally began in October and November and though some of those gains were given back in December, the fourth quarter was positive. The year closed above its June and September lows. Now it is the middle of January 2023 and this rally is still intact. We are following closely to see how it develops in this new year.
It was notable that the market decline in 2022 included both stock and bond markets. The conventional method of managing risk is to soften losses in the stock market by diversifying a portfolio with bonds. In fact, holding bonds and bond funds caused more losses for investors. The S&P 500 was down over 19% for the year and the growth heavy Nasdaq was down over 33%. And, when it comes to bonds, the benchmark 10 year US Treasuries were down 15% and the longer 20 to 30 year US Treasuries were down over 31%. In 2022 bonds were no help at all.
The driving factor challenging the markets is the Federal Reserve Board’s aggressive approach to taming inflation. After four consecutive 0.75% interest rate increases it raised rates 0.50% in December. This move disappointed investors who were hoping to see the Board hold the line on increases and set expectations for some rate reductions in 2023. Instead, the chairman reported that the Board is committed to raising rates until inflation subsides, and they do not expect any rate decreases in 2023. The policy in the future is always subject to change, but the market is signaling that the Fed is being overly aggressive and could send the economy into a recession.
This down trend could linger into 2023, but there are reasons for some optimism. Since the June low, most industry sectors have shown improvement. The sectors that continue to struggle are communications, info technology and consumer discretionary. The mega-cap stocks in these sectors have pulled the indexes down with their heavy weighting. But there was improvement across energy, financials, industrials, consumer staples and healthcare in the last half of the year.
Seasonality favors the market in 2023. Jeffrey Hirsch at Stock Traders’ Almanac is quite bullish on 2023. He reports that the third year of a presidential cycle is historically a positive year for the stock market, and he believes the bear market bottom is in. The positive fourth quarter is consistent with prior mid-term year bear markets which resulted in gains in the pre-election year. History coupled with a Fed that does appear to be nearly done tightening, a GDP for the Q3 which was positive and revised up, and steady unemployment all point to a better year ahead.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.