U.S. Equity Investment Environment
US equities ended the year with the worst performance since 2008. The S&P 500 was down 18.1% and the Nasdaq was lower by 33.1%. The Dow Jones Industrial Average and the S&P 500 rebounded 16.0% and 7.6%, respectively, during the fourth quarter while the Nasdaq declined by 0.8%, highlighting the vast dispersion in performance between sector and style exposures. Underwhelming earnings weighed on tech stocks in the final three months of the year, while concerns about slowing economic growth combined with rising bond yields afflicted overvalued tech stocks the most during the year. The S&P Small-Cap and Mid-Cap outperformed the S&P 500 in the fourth quarter and throughout 2022, while the lower-quality Russell 2000 lagged. Value stocks massively outpaced growth all year. Every S&P 500 sector finished the fourth quarter with a positive return other than consumer discretionary and communication services, which retreated 10.2% and 1.4%, respectively. Energy stocks topped all other sectors not just in the fourth quarter but for all of 2022 finishing the year up 65.7%. Other strong sector performers were industrials and materials, which benefitted from an improving Chinese demand outlook and a weaker U.S. dollar.
International Equity Environment
Foreign markets significantly outperformed the S&P 500 in the fourth quarter. Developed markets topped emerging markets in the last three months thanks in part to a large 17.0% bounce in U.K. shares in response to the resignation of PM Truss and the abandonment of her fiscal spending and tax-cut plan. The MSCI EAFE benchmark of developed markets gained an impressive 17.3% for the quarter although still down 14.4% on the year while the MSCI Emerging Markets Index posted a 9.7% return in the past three months but finished the year lower by 20.1%. Chinese stocks rose 13.5% in the final quarter as Beijing ended its “Zero-Covid” policy and started an economic reopening, while a falling dollar boosted global economic sentiment.
Fixed Income Environment
The Bloomberg U.S. Aggregate Index finished its worst year since its inception in 1977, down 13.0%, despite a positive final-quarter gain of 1.9%, as more aggressive-than-expected Fed rate hikes combined with record-setting inflation pressured all bond sectors in 2022. Although improving from prior months, inflation remained elevated with a CPI number of 7.1% for November. Longer-duration bonds outperformed those with shorter durations in the fourth quarter. For the full year, however, shorter-term bonds handily outpaced longer-duration bonds as the former were less impacted by the Fed’s seven rate hikes in 2022. Credit spreads tightened during the last quarter on improved risk sentiment. The Fed Funds Rate finished the year at its highest level since December 2007 at 4.25% to 4.50%, which led to an inversion of the 3-month and 10-year Treasury yields, an indicator which has preceded the last eight recessions. Although high-yield and longer-duration bonds rebounded the most for the fourth quarter, cash was the best performer with 90-day Treasury Bills returning 1.5% on the year.
The S&P GSCI Index recorded a gain of 3.4% in the fourth quarter, driven by a weaker US dollar and a brighter outlook for Chinese demand as the government moved towards reopening their economy. Industrial metals was the best-performing component of the index, with sharply higher prices in the quarter for nickel, lead, and copper. Within precious metals, silver also achieved strong price gains, while the rise in the price of gold was more muted. For 2022, the S&P GSCI Index posted a gain of 26.0% lead by Energy, which was the top performer.