December experienced declines across market indices, capping off a difficult 2022 for investors. Markets initially rose in December on expectations of easier Fed policy but then reversed when these hopes were dashed. The S&P 500, Dow and Nasdaq declined 5.9%, 4.2% and 8.7%, respectively. The VIX index of stock market volatility rose to 21.67 at month’s end. After a volatile 2 months following FTX’s collapse, Bitcoin fell further to $16,539.50. What do investors need to know about the trends in 2022 that can help them in the year ahead?
- Major market indices fell in 2022. The S&P 500, Dow and Nasdaq lost 19.4%, 8.8% and 33.1%, respectively across the year. This was driven by factors including historic inflation rates, the Fed, the war in Ukraine, and more. Many of these trends will likely continue throughout the new year.
- The Fed raised interest rates by 50 bps in December. This was the seventh rate hike in a row, driven by the Fed’s commitment to bringing inflation down. The Federal Reserve signaled that interest rates may increase further in 2023 and could remain restrictive for longer. The Fed funds rate has risen from 0% last March to 4.25% today.
- Inflation expectations fell to their lowest level since 2021. Inflation expectations for the next year, as reported by the University of Michigan Survey of Consumers, declined to 4.4%. This marks the lowest expected inflation since June of 2021. Consumer sentiment also increased, a welcome sign of the strength of the economy as many worry about a possible recession.
- Markets have been volatile as interest rate policy has evolved. Throughout 2022, inflation and its effects have dominated the economic landscape. High inflation has destabilized businesses and eroded consumer purchasing power, leading to increased economic uncertainty. Rising interest rates have slowed economic growth and hurt the housing market. Still, markets are positive when viewed from a longer-term perspective, including since before the pandemic crash of 2020. If inflation can be tamed, it’s possible that businesses and consumers will feel less pressure over the next year or two.
While markets have proven to be resistant to many negative shocks such as technology layoffs, supply chain disruptions, and the war in Ukraine, economic concerns continue to dictate market movements. Inflation has begun to slow in recent months, but policy makers are still wary of inflation becoming ingrained in the economy. As a result, the Fed has remained committed to bringing inflation under control and keeping interest rates high. As we begin 2023, the path of inflation and interest rates will likely continue to dictate market movements.
Chart: All asset classes were negative in 2022 except for commodities. The “balanced portfolio” is a hypothetical 60/40 portfolio consisting of 60% S&P 500 and 40% Bloomberg Aggregate Index. For illustrative purposes only. Investments cannot be made directly in an index. Data provided by Clearnomics.