Investors will be quick to turn the calendar year to 2023 after the U.S. stock market notched its worst annual performance since 2008, driven by elevated inflation, global recession fears, and tightening monetary policy.
The leading benchmark indexes recorded notable losses in 2022, led by the tech-heavy Nasdaq Composite Index’s 33.1 percent decline. The S&P 500 plummeted 19.4 percent, while the Dow Jones Industrial Average slumped 8.78 percent.
By comparison, the Nasdaq plunged 40.5 percent, the S&P 500 tumbled 38.5 percent, and the Dow Jones lost 33.8 percent in 2008.
The abysmal performance in equities marked the end of an era of easy money policies, according to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
“The most important take of the year is: the era of easy money ended, and ended for good,” she wrote in a note. “This is the beginning of a new era, when central banks will be playing a more subdued role in the markets, with less liquidity available to fix problems—a more than necessary move that came perhaps too late, and too painfully.”
In March 2022, the Federal Reserve began its tightening cycle by raising the benchmark fed funds rate by 25 basis points. By December 2022, the central bank pulled the trigger on 425 basis points, lifting the target range to 4.25 and 4.50 percent, the highest level in 15 years.
Commodities the Lone Bright Spot in 2022
Although crude oil wiped out its post-invasion gains, prices outperformed the broader market.West Texas Intermediate (WTI) crude advanced 6.71 percent to above $80 a barrel on the New York Mercantile Exchange, while Brent crude surged more than 10 percent to just under $86 per barrel on London’s ICE Futures exchange.
Natural gas also enjoyed a bullish 2022, climbing nearly 14 percent on the year. Despite the double-digit gain, natural gas had soared as much as 162 percent this past summer.
Will it be more of the same?
Phil Flynn, an energy strategist and author of The Energy Report, believes so, telling The Epoch Times that he is “very bullish on prices going into the new year.”
“I’m not going to be surprised to see oil eclipse triple digits once again,” he said, citing tightness on the supply side and global spare production capacity “near historic lows.”
ING also anticipates oil prices to average $100 in 2023.
The broader commodities sector also had a great year, led by orange juice’s meteoric ascent of 45.56 percent. But other agricultural products have rallied. Corn surged 14.51 percent, soybean advanced 13.77 percent, live cattle picked up 13.09 percent, and wheat jumped 2.69 percent.
Despite a tough eight-month period from March to November, the yellow and white metals posted exceptional gains in the home stretch of 2022.
Cryptocurrency and Bonds
The cryptocurrency industry and the bond market recorded sharp losses in 2022.
“When stocks are down investors typically re-allocate to bonds, as bonds have historically exhibited a negative correlation to their stock counterparts,” stated Jeffrey Buchbinder, a chief equity strategist at LPL Research. “Unfortunately for traditional investors, that relationship did not hold in 2022, as both bonds and stocks have suffered double-digit losses.”
The Bloomberg Aggregate Bond Index has only had four negative calendar year returns since its inception, with 2022 being by far the worst, according to Buchbinder. The previous worst year on record was 1994 with a 2.9 percent loss, significantly less than the loss of nearly 13 percent in 2022.
Despite its historic losses in 2022, Bryce Doty, senior vice president and senior portfolio manager at Sit Investment Associates, thinks the bond market looks more attractive next year.
What Will 2023 Look Like?
Ken Mahoney, CEO of Mahoney Asset Manager, projects that opportunities will be abundant for investors in 2023.“However, the opportunities and strategies will be much different than we had seen in the ‘golden decade’ for stock investing and will look very similar to what we saw” in 2022, he wrote in a note. “The reason being for this is because not much in the macro picture has changed going into the new year.”
Inflation is higher and persistent, the Fed continues to tighten, and recession is the base case for many investors on Wall Street, Mahoney added.
That said, Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, thinks this is a perfect time for long-term investors.
“I haven’t said this yet but I think you want to buy sell-off, and continue to buy. Even if we get the expected volatility continuing into Q1 2023, we think you keep buying,” she said in a note.
Market experts say that the Fed’s rate increases are traveling throughout the financial system and, according to Arthur Laffer Jr., president of Laffer Tengler Investments, they are doing their job, “albeit slower than everyone hoped.”
“Inflation has peaked and we believe that it will continue to trend down over the course of the year but expect monthly volatility in the series both high and low,” he said in a note. “With higher interest rates will come lower GDP growth going forward and a recession in 2023 in the first half of the year. 3Q 2022 GDP revised higher most likely the result of economic activity accelerating in the first part of 2022 in anticipation of higher borrowing costs from the resulting Fed rate hikes. If this is correct then 4Q 2022 and early 2023 to be lower lending more credence to a recession in early 2023.”
Dubravko Lakos-Bujas, the global head of equity macro research at JPMorgan Chase, thinks weakness in stocks will retest 2022 lows in the first half of 2023 but then end the year higher.
