- Last year was one of the worst for US stocks in over a decade, with Friday’s session last week marking the end of a volatile 2022 calendar year. Last week most major indices posted losses, not only for the week and month, but also registered their first negative year since 2018 with the Dow (8.78%), S&P(19.44%), and Nasdaq(33.10%), all down.
- Treasuries were historically weak this year due to the Federal Reserve’s rapid rate hikes and fears of a potential recession with The 10- year yield starting at 1.5% but more than doubled at 3.7% to end the year.
- Headline inflation (CPI) reached a 9.0% y/y pace in June, the highest pace since 1982 almost 40 years, before beginning to taper off to finish at a 7.1% gain y/y.
- Big Tech rout was in full effect, with the Nasdaq 100 closing near its lowest levels of the year, below 11000, and MSFT(28%) AAPL (27%) META (64%) and AMZN (50%) all down due to the inflationary environment.
- The MBA 30Y mortgage rate topped out at 7.16% in late October, the highest level in more than two decades spurring existing home sales to see their longest streak of declines in over 20 years.
- Declining demand helped European gas prices fall 47% in December as the bloc stocked up on LNG to replace Russian gas.
- NATO allies are currently working on an agreement that could boost defense spending above the current target of 2% of output.
- In Japan, Bank of Japan (BOJ) purchased a record amount of bonds in December as yields quickly rose close to its new upper bound target of 0.5%.
What was supposed to be an upbeat year for equities turned into one of the worst years for US stocks in more than a decade. Friday’s session last week brought the volatile 2022 calendar year to a close. Following the S&P making a fresh all-time high of 4,796 on January 3rd, stocks then slid lower, eventually breaking into bear-market territory in June, failing to meaningfully recover.
The Dow, S&P, and Nasdaq all posted losses not only for the week and month, but registered their first negative year since 2018, and also recorded their worst year since the 2008 Great Financial Crisis. On a year-to-date basis through the end of December, the Nasdaq closed down more than 32%, the S&P finished lower by 18.13% and the Dow outperformed, closing down only 6.86%. Small caps and the Russell 2K lost slightly more than 20% on the year.
Treasuries were historically weak amid the Fed’s rapid rate hikes and looming fears of a potential recession as inflation a 40-year high. The 10-year yield initially stood at 1.5% in the beginning of 2022, only to more than double and close at 3.7% for the year. The 2-year yield rose from 0.73% at the start of the year to 4.64% in early November before pulling back somewhat. The aggressive move in yields caused the 2/10 spread to touch its most negative level in more than 40 years.
Oil was one of the main focuses of the year after:
• Concerns over the Russian invasion of Ukraine
• Economic normalization in China
• Fears about slowing demand amid China’s Covid zero policy
• OPEC’s cautious approach to adding supply in an economic backdrop
But despite a number of macro factors, WTI crude only logged a moderate gain for the year settling up 6.71%. Overall, it was a pretty downbeat year for US equities which came under pressure after the inflationary backdrop and a more aggressive Fed weighed on risk assets. Surging inflation was the overarching concern this year, both for obvious pressures on consumers and businesses, but also in terms of the aggressive policy response from global central banks.
Headline inflation (CPI) reached a 9.0% y/y pace in June, before beginning to taper off to finish at a 7.1% gain y/y according to November’s report. While almost every facet of life became more expensive for US consumers, energy, food prices and elevated shelter costs were the biggest drivers of inflation moving higher.
There were very few places to hide in the sell-off with only Energy and Utilities finishing the year in the green, closing up more than 65% & 1.50, respectively. Communication Services and Consumer Discretionary were the 2 worst performing sectors as fears over growth companies’ valuations and consumer spending concerns emerged. Other major underperformers included pandemic darlings such as Electric Vehicle makers & crypto-related names.
Big Tech was one of the worst performing spaces, given the inflationary backdrop as the Nasdaq 100 closed near its lowest levels of the year. To put the carnage in the tech space in perspective, MSFT and AAPL were two of the best performing FANMAG names, and yet they fell roughly 28% and 27% on the year. META declined more than 64% amid questions about its strategic direction and pressure on digital ad revenue which showed signs of slowing. AMZN lost nearly 50% of its value, while NFLX dropped more than 51% after struggling to keep subscribers on their platform. While tech and consumer discretionary related names came under the most pressure, in general most equities finished the year down anywhere from 25-50% for the year.
As we kick-off 2023, many of the same narratives among investors remain unchanged, with concerns:
• That persistent and elevated inflation may now tip the economy into a recession later in 2023, as consumers continue to curb spending to account for higher financing rates.
• Continued aggressive monetary policy may lead to a policy mistake from the Fed, which could pressure 2023 corporate earnings. Ultimately, the largest overhang on markets continues to be the Federal Reserve’s commitment to a “higher-for-longer” policy relative to rates and their ability to bring down inflationary pressures back to their long-run target of 2%, without inflicting too much damage upon the labor market.
On the other hand, supportive factors include:
• A very resilient consumer (With data showing overall debt remaining near-record lows, despite savings at all-time lows).
• Disinflationary signals which have emerged since headline CPI peaked in June (and Core in September, touching 6.7% y/y).
• Improving supply chain dynamics as China moves off their Covid-Zero policy. Despite the recent release of jobless claims data showing continuing claims at their highest level since February, many economists believe that the labor market remains resilient and that the US could avoid a recession.
ELSEWHERE IN THE NEWS FOR THE YEAR:
• Russia launched an invasion of Ukraine in February. While Russia was quick to make gains, Ukraine’s resistance was stiff following financial and material aid from Western countries. The event as a whole presented a significant amount of headline risk. Despite initially having an impact on commodity prices (Mainly food and energy), market participants became fairly accustomed to Russia’s President Vladimir Putin, making remarks about possible nuclear responses, which failed to become a significant day to day concern for the market by year end.
• Oil which came off a strong year in 2021, posting gains of 55%, also saw strong gains to start the year following the invasion of Ukraine and broad economic normalization trends. WTI crude jumped 64% touching a peak in March of $130/barrel before ultimately declining in the 2H of the year.
• The US housing market was challenged to say the least through the year after rapidly rising mortgage rates and high home prices led to demand destruction. The MBA 30Y mortgage rate topped out at 7.16% in late October, the highest level in more than two decades, before falling to 6.34% near the close of the year. To put this in perspective, 2021 ended the year at 3.31%. Homebuilder confidence hit its lowest non-pandemic mark since June 2012, while existing-home sales saw their longest streak of monthly declines since 1999.
• The 2022 congressional midterm elections resulted in more of a whine than a bang. With economic unease, high gas and food prices, an overarching theme of a higher cost of living, and low polling numbers for President Biden, many expected there could be a red wave that could sweep through US elections. In actuality, the forecasted red wave did not materialize, and Republicans wereonly able to gain a small majority in the house, while Democrats were able to widen their slim-control over the Senate. The split was considered a bullish development in the sense that a divided government is unlikely to generate any new spending plans or come to an agreement on a number of significant reforms.
• Cryptocurrencies slumped for most of the year with Bitcoin bottoming out near $15K before finding some footing. In contrast it’s alltime high was above $68K in November of 2021. The risk off tone in markets followed-through to Crypto currencies with the collapse of the Terra “Stablecoin” in May, the downfall of Crypto lender Celsius in June and the widely documented collapse of highly touted FTX. It remains to be seen when and if broader adoption into the asset class will take effect and in what way decentralization for crypto currencies will survive.
INTERNATIONAL:
The Bloomberg World index closed the year down 20% from a year ago, as value dropped 8.77% and growth stocks plunged 29.75%. 2022 was a volatile year with uncertainty caused by the Russian invasion of Ukraine, changing economic conditions due to high inflation and monetary policy actions. The British pound erased 10% of its value versus the dollar amid political turmoil and a flight to the dollar as a safe haven. Energy was in the spotlight in 2022, with Brent oil surging 10.45% for the year. 2023 comes with new challenges and opportunities as effects of policy tightening are expected to trickle down to the economy.
EUROPE
European gas prices declined to the lowest level since the Russian invasion of Ukraine amid above seasonal norms temperatures. Two weeks ago, European nations agreed to cap gas prices at €180 to protect European consumers from rising prices. Declining demand also helped European gas prices fall 47% in December as the bloc stocked up on LNG to replace Russian gas. According to Gas Infrastructure Europe, Germany’s gas storage level crossed 90% last week. German Chancellor Olaf Scholz said in his New Year’s address, “New LNG import terminals are making our country and Europe independent of Russian gas for the long term.”
NATO allies are currently working on an agreement that could boost defense spending above the current target of 2% of output. Germany said it is open to seizing Russian assets to help Ukraine if legal issues are cleared and it obtains backing from allies. Although it was hard to find consensus, Europe has managed to reduce its dependence Russian oil in the short-term. In fact, Bulgaria is now the only European destination for Russia’s seaborne crude exports as the four-week average crude shipments from Russia to Europe dropped to 167,000 barrels per day. The Euro STOXX index dropped 0.61% last week, with energy stocks down 1.04%.
APAC
In China, regulators asked online brokerage firms to rectify their business as cross-border brokerage is now considered illegal. Shares of online brokerage Futu Holdings plunged 31% on the news on Friday, while its competitor, Tiger Brokers dropped 28.5%. The regulatory framework behind cross-border trading restrictions is the need to protect data privacy and ensure data sovereignty. Tiger Brokers announced that it is cutting staff to “optimize its organizational structure and increase efficiency”. This increased scrutiny may negatively affect investors’ sentiment as dip buyers bet on a recovery. The Hang Seng index gained 0.96% last week.
In Japan, Bank of Japan (BOJ) purchased a record amount of bonds in December as yields quickly rose close to its new upper bound target of 0.5%. The BOJ also pledged last Friday to buy unlimited amounts of bonds across different maturities as needed. The Japan 10-year yield is currently trading at 0.42% following the BOJ purchases. For context, yields reached a high of 0.48% after the announcement of the new upper bound target on December 21st. The swaps market is betting that yields will go substantially higher from here and surpass 0.8%. The NIKKEI 225 index declined 0.54% last week.
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