Quarterly Financial Market Update: Q4 2022

For many investors, 2022 has been a challenging year. Markets were roiled by the outbreak of a land war in Europe, inflation hitting highs not seen in decades, and a pace of interest rate increases that have been historic. While finishing the quarter with positive returns, the gyrations of markets in the fourth quarter did little to assuage investors’ general unease moving into 2023.

Returns as of December 31, 2022 (%)

Source: Morningstar. Past performance does not guarantee future results. All data is from sources believed to be reliable but cannot be guaranteed or warranted. Please see important disclosure regarding index performance.

Equities

Despite a negative finish in the last month, global equities for the most part finished the quarter in positive territory.

• U.S. markets, led by energy and value stocks, finished the quarter up, though still considerably down for the year.
• International developed stocks were buffeted by the same macro headwinds in December but ended the quarter in positive territory.
• Emerging market stocks performed in a similar fashion, ending the quarter up while finishing the year down.¹

Fixed Income

Bonds have been caught up in the same macroeconomic issues swamping equities and, as a result, have echoed the performance pattern. U.S. Treasury Inflation-Protected Securities (TIPS), designed to offset the effects of rising prices, outperformed.

• The Bloomberg Barclays U.S. Aggregate Bond Index, or the “Agg,” finished slightly positive on the quarter, though down for the year.
• The Bloomberg Barclays Global Aggregate Index, representing bonds from both developed and emerging markets, also ended up for the quarter but down for the year.²

Factors

On the whole, investment risk factors have been positive contributors (on a relative basis) in most markets. In the U.S., Value and Minimum Volatility have led the group, while in international developed and emerging markets, the Value factor has outperformed the general market.³

News Impacting Markets

• Inflation
  To combat the economic impact of the pandemic, both the Fed and Washington brought to bear unprecedented levels of fiscal and monetary stimulus. Much of that surplus money found its way into consumers’ pockets, which they collectively used to buy “stuff.” Unfortunately, consumers purchased so much stuff that we’ve been pushing prices up at a 7% annual clip since 2020. This has, in turn, pushed up overall inflation. By June, the Consumer Price Index (CPI) had soared to a four-decade high of 9.1%.
• The Fed and Interest Rates
  In response to inflation pressures running amok, the Fed engaged in a series of unprecedented rate increases in a short period, bringing the benchmark rate up to a target range of 4.25% to 4.5% by year-end.
  The sharp increase in rates reverberated across financial markets, depressing assets from U.S. Treasuries (the 10-year Treasury note has seen its worst performance in 234 years)⁴ to growth-oriented tech stocks (the FAANG stocks–Facebook’s parent Meta, Apple, Amazon, Netflix, and Google’s owner Alphabet–have lost $3.03 trillion in market cap in 2022, almost 25% of the total market cap lost in the U.S.)⁵ to real estate (the Dow Jones U.S. Real Estate Index is down over 27% for the year).⁶
• The Specter of Recession
  Despite the pace of inflation cooling by December, the Fed has given guidance that they will continue to maintain an aggressive posture to keep inflation from becoming entrenched across the economy. This has exacerbated fears across markets that the Fed will keep rates elevated to the point that they will begin to drag on the economy and will likely lead to higher levels of unemployment, thereby inducing a recession.

Markets are forward-looking, and current prices tend to reflect expectations for the future. When expectations for a recession are prevalent among investors, as they are now, it’s likely already reflected in prices. This is one of the reasons it is not uncommon for global markets to reward investors even when economic activity has slowed. For instance, over the past century, investors in the U.S. have endured 15 recessions. In 11 of the 15 (or 73% of the time), returns on stocks were positive two years after a recession began, with an annualized average market return of 7.8%.⁷

It has been a challenging year for investors, and there is likely more turbulence ahead. However, time and again, it’s seen that the best option for the long-term investor is to maintain the course with their portfolio. The returns over time available to long-term investors are the reward for their steadfast patience through short-term market movements or macroeconomic events.

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