December 2022 in Review

by Daniel Zeigler, CFP®, CMFC®, Senior Portfolio Manager

Welcome to the monthly market update from Midland Wealth Management. I am Dan Zeigler, Senior Portfolio Manager. Today I just wanted to take a few minutes to give you an update on the markets for the month of December and for the year 2022.

Investors were hoping for a Santa Claus rally in late December, however, the market had other ideas. Stocks finished lower for the month as we closed out a brutal 12 months of trading. For the month, the S&P 500 was down 5.8% and the NASDAQ was down 8.73%, however, international developed equities did fare better for the month and ended slightly positive.

The top 3 equity indexes all posted losses for the year and experienced their worst yearly decline since 2008 as they snapped a 3-year win streak. The Dow Jones did fare better which was down about 8.8%, while the S&P 500 was down 19%, and the technology-heavy Nasdaq index tumbled 33%.

The markets continue to wrestle with the ultimate impact of aggressive Fed actions to try to combat inflation. The Fed has signaled that restrictive policy will likely have to remain in place for longer and at a potentially higher ‘terminal rate’ than expected. The Fed’s actions in 2022 have led to a valuation reset of global equites with the capital markets now pricing in a significant global economic slowdown. The key question for 2023 is whether this deceleration will end in a ‘soft landing’ with slower but still positive growth or in a full-fledged recession that drags down earnings. Investors will be paying close attention for continued signs that inflation continues to decelerate and any clues that the central banks are getting closer to a peak in rates.

Stock valuations have come down from their extreme levels and are now trading close to their 25-year averages. Investors will also be paying close attention to corporate 4^th quarter earnings, which will begin announcing in January. The overall earnings growth rate for the S&P 500 in 2023 is expected to be about 5.5%, which is about 3% lower than the 10-year average.

The bond market did not fare much better for the year as the Federal Reserve raised interest rates 7 consecutive times during the year, for a total increase of 4.25%. Interest rates are now back to levels not seen since 2007-2008 with the Fed funds rate at 4.25% to 4.50%. Continued rate increases are expected in 2023 but most of the tightening is likely behind us. Rates are projected to increase 75 basis points throughout 2023. The bad news to rising interest rates is negative fixed income performance. The Bloomberg U.S. Aggregate Bond Index finished down 13% for the year, which is the worst year on record. The 10-year Treasury bond finished 2022 around 3.88%, up from 1.51% at the end of 2021. The good news to rising interest rates is fixed income investments are now yielding over 4%, and bonds should provide stability to investor’s portfolio going forward.

As we enter 2023, we continue to maintain our cautious view of the equity markets. We see slower economic growth and weaker corporate fundamentals, namely declining earnings growth and weaker profit margins in the first half of 2023. This could then give way to a stronger second half as investor sentiment improves as we see an end to central bank tightening and continued improvement on the inflation front.

As always, if you have any questions or want to speak to someone, please do not hesitate to give us a call. Make sure to check out our latest year-end newsletter for additional insight and I hope everyone has a great Happy New Year!