Stocks finished 2022 much like they began the year. The S&P 500 fell 5.76% for the month of December to cap off a tumultuous year as the mythical Santa Clause rally failed to materialize. For the entire 4th quarter of 2022, the market did manage to rise with the S&P returning 7.6%, the only quarter to show a positive return. For all of 2022, the S&P delivered a negative 18.1% return. The worst calendar year since 2008 when the market was down 37%.
In fact, as the chart above from Goldman Sachs shows, there were very few places to seek refuge in the past year. On a sector basis, Energy and Utilities were the only two that finished on the plus side of zero.
Perhaps one of the biggest surprises last year was the performance from the bond market. Traditionally, in times of volatility the bond side of the portfolio can be relied upon to provide somewhat of a ballast. However, last year’s efforts by the Federal Reserve to tame inflation by aggressively hiking interest rates from zero to 4.5 percent led to an unprecedented sell-off in the fixed income markets. The Bloomberg Aggregate Bond Index finished 2022 with a return of -13.01%, the worst since the benchmark’s inception in 1976.
Looking Ahead to 2023 (and Beyond)
2022 was one of the most difficult years in history to be an investor in the financial markets. That’s the bad news. The good news is that all of that is now behind us.
The silver lining to the past year’s market action is that the starting point today is more attractive than it was at the beginning of last year. As asset prices decline, expected future returns improve.
While our crystal ball doesn’t tell us much about whether 2023 will be dramatically different or if there will be more challenges, we can learn from history that eventually things will start to improve. The most difficult part of being an investor is enduring the difficult times in anticipation of better times ahead. Unfortunately, there is never clarity as to when we have reached the lows. Markets generally turn well ahead of the macroeconomic statistics.
The chart below provides the return needed just to return to the prior high from a year ago. The path back to those levels is unlikely to occur in a straight line, but history shows that every bear market has eventually been followed by a new bull market that leads to new highs.
Source: JP Morgan Guide to the Markets
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