Key Takeaways, Fourth Quarter 2022
By Ralph Goldsticker, CFA | Jan 2023
Despite a positive fourth quarter, stocks and bonds fell significantly during the year. Most of the market correction came from lower valuations rather than lower earnings expectations. While inflation continued to trend down, it remains elevated and continues to be a concern. Investors are focused on the potential impact of higher interest rates on economic growth, and the resulting impact on corporate earnings.
The Fed continued to signal inflation is its top priority. It increased the Fed Funds rate twice during Q4. There were seven increases in 2022, bringing the middle of the target range to 4.375%, up from practically 0% at the start of ‘22.
Recent inflation, longer-maturity interest rates, TIPS’ break-even rates, the Fed’s Dot-Plot, and economists’ surveys all suggest that the recent high inflation will be contained. Unemployment remains low, and job growth steady. Forecasts of corporate earnings seem to be holding up, suggesting that security analysts are not forecasting a severe recession.
Reversing the pattern of the first three quarters, stock markets rose during the fourth. The broad US market gained 7.2%. Aided by a weakening dollar, developed international stocks rose 17.3%, and emerging markets 9.7%. All markets were down for the year: US 18%, developed international 14.5%, and EM 20%.
US growth stocks underperformed during Q4, rising 2.2% versus 12.4% for value. For the full year growth lagged value -29% versus -7.5%.
Energy continued to lead gaining 21%, while Consumer Discretionary lost 7.4%.
Energy was the clear winner for the full year, gaining 63%. Growth-sensitive sectors lagged. Consumer Services lost 40%, Consumer Discretionary 36%, and Information Technology 30%.
During the quarter, the yield of 3-month T-Bills rose 1.09%, the yield of 10-year Treasuries 5 bps, and 30-year 18 bps. Both Investment Grade (IG) and High Yield (HY) credit spreads narrowed, but are still much wider than at the start of the year.
The 3-month T-bill yield finished at 4.42%, up 4.36 for the year.
After finishing Q3 at 3.83%, the yield of 10-year Treasury bonds climbed to 4.25%, before finishing Q4 at 3.88%, up 2.35% for the year.
The aggregate US bond market gained 1.9%, but was down 13% for the year.
IG bond spreads narrowed by 26 bps and HY by 83. Since the start of the year, IG spreads are 34 bps wider, and HY 1.86%.