A December decline in US equity markets partially offset a vigorous rally earlier in the fourth quarter of 2022. Despite posting an overall 7.56% quarterly gain, the S&P 500 index fell 18.11% in 2022. The MSCI EAFE developed markets index (-14.01%) and MSCI Emerging Markets index (-19.74%) also fell as international markets struggled in concert with US stocks.
Investors’ challenges with the equity bear market were compounded by the worst bond market performance in modern history. The Fed’s war on the rampant inflation it helped create pushed bond prices down and interest rates up – precipitously. High quality (US Treasuries and investment grade corporate) bond values posted historic declines, rather than serving as buffers against stock market volatility as they have historically done in most bear markets. The Bloomberg Aggregate Bond index decline of 13.01% in 2022 masks the full extent of the carnage felt in certain pockets of the bond universe. Most notably, the 30-year US Treasury bond lost over 40% of its value as its income yield more than doubled over the course of the year. Also noteworthy is the inversion of the yield curve as short term interest rates surpassed long term rates over the past year. This condition has historically been a precursor to recession.
A closer look under the hood of the US stock market reveals a wide variance in performance among different sectors of the corporate world. While the S&P 500 index declined 18.11%, the so-called ‘value’ stocks included in the index fell just 5.23% versus a 29.41% drop in the index’s ‘growth’ stock components. The 2022 returns of the growth-heavy NASDAQ composite index (-32.54%) versus the Dow Jones Industrial Average (-6.86%) further confirms the performance gulf between those companies with more resilient cash flows and dividends versus those with cyclical businesses which had become overvalued as the now-defunct bull market peaked in 2021.
This rotation to value stocks is normal as the economy slows; what isn’t normal under such conditions is high inflation and rising interest rates. These rare economic conditions help explain the erratic stock market, which since mid-June has seen alternating runs of +17.4% (8 weeks), -16.9% (8 weeks), +13.8% (7 weeks), and -5.7% (4 weeks and running). Such trading patterns are emblematic of bear markets, as are still-elevated stock prices relative to corporate profits despite the magnitude of the market decline up to this point. Investors should be wary of the potential for another significant downturn and new lows for the broad indexes, which have not yet tested the levels indicative of past bear market bottoms.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Market data provided by JPMorgan Asset Management and MarketWatch.com.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed
country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.