Posted January 9, 2023
December Sell-Off Caps Turbulent Year
Markets sold off in December, with the negative month contributing to mixed results for the quarter and declines for 2022. The S&P 500 lost 5.76 percent during the month, which held the index to a 7.56 percent gain for the quarter. Despite the fourth-quarter rebound, the S&P 500 lost 18.11 percent over the course of the year. The Dow Jones Industrial Average (DJIA) was similar, with a 4.09 percent decline in December holding the index to a 16.01 percent gain for the quarter. The DJIA still lost 6.86 percent for the year. Finally, the Nasdaq Composite lost 8.67 percent in December, which led to a 0.79 percent decline for the quarter. The technology-heavy index lost 32.54 percent throughout the year as rising rates and slowing growth weighed on investors.
Negative results for the month and year came despite better-than-expected earnings growth. Per Bloomberg Intelligence, as of December 30, 2022, with 99 percent of companies having reported actual earnings, the blended earnings growth rate for the S&P 500 in the third quarter was 4.6 percent, up from estimates at the start of earnings season for a 2.6 percent increase. This solid outcome follows better-than-expected earnings growth in both the first and second quarters of 2022 and shows that businesses continued to successfully operate despite economic headwinds. Ultimately, fundamentals drive long-term market performance, so continual earnings growth was a positive development that bodes well for markets as we head into the new year.
While fundamental factors were supportive to end the year, the same cannot be said for technical factors. The S&P 500 ended the year below its 200-day moving average, as the year-end sell-off brought the index below trend after a brief stint above trend at the end of November and start of December. The DJIA finished December above trend, marking three consecutive months with technical support for the index; however, the Nasdaq Composite ended the month below trend. The 200-day moving average is a widely followed technical indicator as prolonged breaks above or below trend can signal shifting investor sentiment for an index. The mixed technical indicators at the end of 2022 indicate uncertainty for equity investors to start 2023.
International markets were mixed in December, but results were similar to the U.S. on a quarterly and annual basis. The MSCI EAFE Index gained 0.08 percent in December, capping off a 17.34 percent return for the quarter. Despite the positive end to the quarter, developed international equities ended the year down 14.45 percent. The MSCI Emerging Markets Index lost 1.35 percent during the month and gained 9.79 percent for the quarter. Emerging market stocks lost 19.74 percent for the year. Slowing global growth and high levels of global inflation were headwinds for international equity investors.
Technicals were mixed for international markets to end the year. The MSCI EAFE Index finished the month above its 200-day moving average, which marked two consecutive months finishing above trend. The MSCI Emerging Markets Index, on the other hand, ended December below trend, marking 18 consecutive months with the index finishing below its 200-day moving average.
Fixed income markets also experienced declines in December and for the year, largely driven by rising interest rates. The 10-year U.S. Treasury yield rose from 1.63 percent at the start of the year to 3.88 percent by year-end. Short-term yields saw even larger increases as the 1-year U.S. Treasury yield surged from 0.4 percent at the start of 2022 to 4.73 percent at year-end. The rise in yields was primarily due to higher rates from the Federal Reserve (Fed) as the central bank hiked the federal funds rate 4.25 percent in 2022 to combat inflation. These higher rates caused sell-offs for fixed income investors.
The Bloomberg U.S. Aggregate Bond Index dropped 0.45 percent during the month but managed to notch a 1.87 percent gain for the quarter. This was not enough to offset losses from earlier in the year as the index lost 13.01 percent in 2022. The Bloomberg U.S. Corporate High Yield Bond Index saw a similar 0.62 percent decline for the month, a 4.17 percent gain for the quarter, and an 11.19 percent decline for the year. High-yield credit spreads widened notably last year, increasing from 3.05 percent at the start of 2022 to 4.81 percent at year-end. Wider credit spreads indicate that investors became more cautious throughout the course of the year.
Economic Updates Remain Positive
Despite market turmoil, economic data releases showed continued economic growth to close out 2022. The labor market saw signs of surprising strength toward the end of the year, as the November employment report revealed 263,000 jobs added against calls for 200,000. The unemployment rate ended November at 3.7 percent, which was down from the start of the year, in a sign that jobs were still plentiful near year-end. This is an encouraging sign that economic fundamentals remained healthy toward year-end as a strong labor market has historically supported consumer and business spending.
Consumer and business spending had encouraging signs of strength toward year-end. Personal income and spending both rose in November, which marked four straight months with spending growth. Consumer spending growth was relatively consistent last year—supported by Covid-19 pandemic-era savings and a strong labor market—which was impressive given economic headwinds as well as declining confidence.
Core durable goods orders, which are viewed as a proxy for business investment, rose in November following a solid jump in October. This indicates that businesses continued to spend and invest to meet high levels of demand toward year-end. Additionally, both consumer and service sector confidence showed improvements toward the end of the year, which should help support future spending growth.
Housing Continues to Slow
Not all economic news for 2022 was positive as the housing sector showed signs of continued slowdown at year-end. After serving as a bright spot in the post-lockdown economic expansion in 2020 and 2021, the housing sector slowed notably in 2022 due to low supply of homes for sale, high prices, and rising mortgage rates dramatically affecting the pace of home sales. As you can see in Figure 1, the pace of existing home sales fell in November to its lowest level since the lockdown-induced nadir in May 2020.