MARKET COMMENTARY: Q4 2022
Big Picture
For most investors, 2022 has felt like a “terrible, horrible, no good, very bad” 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.
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 disclosure at the end of commentary for limitations to index performance.
Equities
Despite a negative finish in the last month, global equities for the most part finished the quarter in positive territory.
US 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.
The Bloomberg Barclays US 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 US, 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 our pockets, which we collectively used to buy “stuff.” Unfortunately, we’ve been buying so much stuff that we’ve been pushing prices up at a 7% annual clip since 2020. Which 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 feds & interest rates
In response to inflation pressures running amuck, 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.
Final Thoughts
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 US 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, we see that the best option for the long-term investor is to maintain the course with their portfolio, for the returns over time available to long-term investors are the reward for their steadfast patience thru short-term market movements or macroeconomic events.
(1) (2) Morningstar Direct, as of Dec 31, 2022
(3) Morningstar Direct, as of Jan 4, 2021
(4) Kollmeyer, B. (2022, October 28). What’s next for bonds after 10-year Treasury note’s worst performance since 1788? MarketWatch.
(5) Keown, C. (2022, December 23). Big Tech’s 2022 Goes From Bad to Worse. Just Look at These Data. Barron’s.
(6) S&P Dow Jones Indices as of 12/27/2022
(7) Source: Dimensional. Growth of a hypothetical investment of $10,000 in the securities in the Fama/French US Total Market Research Index over the 24 months starting the month after the relevant Recession Start Date. Sample includes 15 recessions as identifed by the National Bureau of Economic Research (NBER) from October 1926 to December 2007. NBER defnes recessions as starting at the peak of a business cycle.
disclosures
Symmetry Partners, LLC, is an investment advisory firm registered with the Securities and Exchange Commission (SEC).
The firm only transacts business in states where it is properly registered, or excluded or exempt from registration requirements. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non- investment related content made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice. Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Past performance does not guarantee future results.
Index Disclosure and Definitions All indexes have certain limitations. Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance. Actual performance for client accounts may differ materially from the index portfolios.
S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization. Dow Jones Industrial Average (DJIA) Is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The Nasdaq Composite Index (NASDAQ) measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market, and includes over 2,500 companies. MSCI World Ex USA GR USD Index captures large and mid cap representation across 22 of 23 developed markets countries, excluding the US. The index covers approximately 85% of the free float-adjusted market capitalization in each country. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI). The index consists of the 25 emerging market country indexes. Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year. Bloomberg Barclays Global Aggregate (USD Hedged) Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers. Index is USD hedged.
© Morningstar 2022. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.