In December, markets sold off contributing to mixed results for the quarter and declines for 2022. High inflation levels and Fed rate hikes impacted the markets for the month, quarter, and year. Despite market turbulence, job growth, consumer spending, and business investment rose. 

December Sell-Off Caps Turbulent Year

The S&P 500 lost 5.76 percent during the month, gained 7.56 percent for the quarter, and lost 18.11 percent for the year. Dow Jones Industrial Average (DJIA) declined 4.09 percent in December, gained 16.01 percent for the quarter, and lost 6.86 percent for the year. The Nasdaq Composite lost 8.67 percent in December, 0.79 percent for the quarter, and 32.54 percent for the year.

Per Bloomberg Intelligence, as of December 30, 2022, with 99 percent of companies reporting actual earnings, the S&P 500 blended earnings growth rate in the third quarter was 4.6 percent, up from estimates for a 2.6 percent increase.

The S&P 500 ended below its 200-day moving average, as the year-end sell-off brought the index below trend after being above trend at the end of November/start of December. The DJIA finished December above trend for the third consecutive month; the Nasdaq Composite ended below trend.

The MSCI EAFE Index gained 0.08 percent in December and 17.34 percent for the quarter. Developed international equities ended the year down 14.45 percent. The MSCI Emerging Markets Index lost 1.35 percent during the month, gained 9.79 percent for the quarter, and dropped 19.74 percent for the year.

The MSCI EAFE Index finished the month above its 200-day moving average, marking two consecutive months finishing above trend. The MSCI Emerging Markets Index ended December below trend for the 18th consecutive month.

Fixed income markets also experienced declines in December and for the year. The 10-year U.S. Treasury yield rose from 1.63 percent to 3.88 percent by year-end. The 1-year U.S. Treasury yield surged from 0.4 percent at the start of 2022 to 4.73 percent at year-end.

The Bloomberg U.S. Aggregate Bond Index dropped 0.45 percent for the month, gained 1.87 percent for the quarter, and lost 13.01 percent in 2022. The Bloomberg U.S. Corporate High Yield Bond Index declined 0.62 percent for the month, gained 4.17 percent for the quarter, and dropped 11.19 percent for the year. High-yield credit spreads widened, increasing from 3.05 percent to 4.81 percent.

Economic Updates Remain Positive

The labor market saw signs of surprising strength toward the end of the year, as the November employment report revealed 263,000 jobs added against calls for 200,000. The unemployment rate ended November at 3.7 percent, which was down from the start of the year.

Personal income and spending rose in November for the fourth consecutive month. Consumer spending growth was relatively consistent last year. Core durable goods orders rose in November. Consumer and service sector confidence also showed improvements toward the end of the year.

Housing Continue to Slow

After serving as a bright spot in 2020 and 2021, the housing sector slowed in 2022 due to low supply of homes for sale, high prices, and rising mortgage rates. As shown in Figure 1, the pace of existing home sales fell in November to its lowest level since the lockdown-induced nadir in May 2020.

The average 30-year mortgage started 2022 at 3.3 percent and hit a high of 7.35 percent in November before ending the year at 6.66 percent. The housing sector is expected to experience ongoing, short-term slowing growth.

Existing Home Sales, Seasonally Adjusted Annualized Rate, 2017-Present

Source: National Association of Realtors/Bloomberg

Inflation Slowing but Risks Remain

A major market and economic risk last year was high inflation. The Fed responded by hiking rates and tightening monetary policy throughout 2022, which caused sell-offs across equity and fixed income markets.

While markets continue to price in higher short-term yields in the first half of this year, expectations call for looser policy toward year-end. This could lead to additional market volatility. Political risks are also set to take center stage.

Abroad, the main risks to start the new year are the Russia-Ukraine war and the slow reopening of China as the country eases Covid-19 restrictions. The Ukraine war’s impact on markets declined toward the end of 2022, but continued conflict could lead to further uncertainty. China’s reopening efforts are widely viewed as a positive development for the global economy following months of lockdowns.

We enter 2023 with a relatively positive backdrop. While risks remain, economic fundamentals are solid, and market valuations are more attractive now.

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Michael Embrescia is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. ​Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network^®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330) 954-3770 or at info@emvisioncapital.com.

Market Commentary Disclosure

All information according to Bloomberg, unless stated otherwise.

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg U.S. Corporate High Yield Index covers the USD-denominated,
non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.