2022 A Year in Review
Many investors are happy to see 2022 end! After a roaring 2021 driven by easy money and high levels of stimulus, the proverbial chickens came home to roost in the form of high inflation. As a result, the Federal Reserve began the fastest pace of interest rate hikes in history, driving down the price of stocks, bonds, and real estate. The U.S. stock market, which declined -19%, had its worst year since 2008 and the bond market, which declined more than -13%, had its worst year in at least 50 years. Growth stocks, which had been flying high for the past decade, were particularly hard hit with a -30% drop for the year.
While the decline in stocks is notable, it is the bond market decline that really stands out. From 1926-2019 the average annual return for US bonds was 5.33%. The worst year was 1969, which logged a -8.13% decline. 2022’s -13% was truly an outlier, making it one of the worst years for bondholders, who are typically conservative investors looking for more stable returns. Typically, bonds increase in value when the stock market declines. But in 2022 both stocks and bond declined damaging even well diversified portfolios.
At the beginning of 2022 we highlighted that inflation, caused by the Covid interventions, were likely to be the most significant issue during 2022. Sure enough, inflation was (and still is) the primary issue driving both stock and bond markets. We wrote extensively about inflation during the year, so that many of you are probably tired of hearing about it. The market seemed to be paying attention to the inflation figures as well, as market inflection points were triggered by releases of inflation data or comments by the Federal Reserve Chairman. We were also cautiously optimistic that inflation would moderate during the second half of 2022. And while inflation has moderated somewhat, it has not yet been enough to sooth investor’s concerns.
Of course, 2022 had it’s share of surprises, including the war in Ukraine, which added to the inflationary pressure, particularly in oil and food, and added to global risk. Cryptocurrencies imploded, as did China’s real estate market, adding to the woes. These issues remain unresolved as the year ends.
Somewhat ironically, economic data was good, or at least not as bad as the stock market declines would imply. The jobs market remained hot and consumer spending strong. In some ways, the stock market declines have been driven by an anticipated recession. As the year comes to a close, there is a tremendous amount of pessimism in the economy. Next week, we will discuss the 2023 outlook and consider whether the pessimism is warranted. So, let’s say goodbye to 2022. I wish you a happy and blessed 2023!