INVESTMENT STRATEGY

December 2022 Market Lookback

By: Liz Young · January 06, 2023 · Reading Time: 5 minutes

In response to data pointing to a strong consumer & potentially overheated labor market, stocks sold off early in the month. The release of cooler-than-expected inflation data on Dec 13 led to a pop in markets, but that was quickly erased after a hawkish Fed statement on Dec 14. Treasury yields drifted noticeably higher as trading volumes fell with the holidays approaching.

Macro

•   The Federal Reserve raised the fed funds rate by 50bps to an upper bound of 4.5% on Dec 14, with 17 of 19 Fed officials expecting rates to rise higher than investors anticipate in 2023.

•   Nov CPI surprised to the downside on both a headline & core basis, at 7.1% & 6.0% y/y and 0.1% & 0.2% m/m, respectively.

•   Continuing jobless claims surpassed 1.71mil in mid-Dec, the highest level since early Feb 2022.

•   Building permits fell to 1.35m in November, their lowest level since Jun 2020 & significantly below the consensus estimate of 1.48mil.

Equities

•   After selling off in response to a persistently hawkish Fed message, stock indices largely moved sideways during the second half of the month.

•   S&P 500 EPS estimates for 2023 declined from $230 to $224 in December, suggesting no growth over 2022.

•   U.S. stocks underperformed international markets, with a significant rise in Treasury yields disproportionately weighing on the biggest US companies & higher valuation areas of the market.

•   Equity funds saw net outflows of $86.0bn in December, with income-oriented funds being the only fund type to see net inflows ($3.3bn).

Fixed Income

•   While 1-Yr Treasury yields were unchanged, longer-term yields such as the 10-Yr tenor rose almost 30bps in Dec.

•   Option-implied Treasury volatility (MOVE Index) fell to its lowest level since August after initially spiking in the lead-up to the Fed meeting.

•   Bond funds saw net outflows of $38.6bn in December, greater than the prior 12-month average outflow of $31.5bn.

Crypto

•   On the heels of FTX’s collapse, renewed scrutiny into cryptocurrency exchange Binance contributed to further fear, uncertainty, and doubt in the crypto space.

Coal in Investors’ Stockings

December is usually good for investors, with stocks averaging a dividend-adjusted return of +1.5% for the month. That puts the month as the third best for stocks going back to 1928. Unfortunately, it wasn’t meant to be—the Santa Claus rally didn’t materialize and instead the S&P 500 got coal in its stocking in the form of a total return of -5.8%.

The index ended the year with a total return of -18.1%, which actually sounds less severe than the level of volatility investors dealt with. The only month with a return close to its historical average was May, and even that was characterized by an initial decline of 5.5% before stocks rallied 6.0% to finish the month. All other months all ended either up 3% or down 3%, with seven of the other 11 months in the red.

Since 1928, calendar years 1931 & 1935 were the only other years in which 11 months saw returns of more than +3% or less than -3% returns, while 1931 & 1937 were the only years with seven months of -3% or below returns. Putting it in perspective, 2022 held the widest monthly moves in returns since the Great Depression.

China Zeroes out Zero-COVID

The first major world economy to pursue a policy of lockdowns was China, and now it appears as if it will also be the last. Significant protests in response to ongoing lockdown measures appear to not only have pushed China to abandon its Zero-COVID policy, but to abandon it rapidly.

According to reporting from Bloomberg News and the Financial Times, internal estimates from China’s top health officials indicate that as many as 248 million people may have caught COVID-19 in the first 20 days of December, representing nearly 18% of the entire country’s population.

While fully reopening will be a months-long process, China’s status as the second-largest economy means it will have global economic implications. For one, outbound travel from China remains ~95% below pre-pandemic levels, so an eventual increase in demand from China would help boost a slowing global economy. Complicating things is that more demand usually adds to inflation, but a reopened China means less supply chain disruption, which should reduce inflationary pressures. How exactly China’s reopening affects growth & inflation will be an important factor for markets moving forward.

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Performance data quoted represents past performance. Past performance does not guarantee future results. Market returns will fluctuate, and current performance may be lower or higher than the standardized performance data quoted.

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