January 4, 2023
Market Monitor: December Update
Headlines and Highlights
- Bad December caps terrible year for stocks: Global stock markets tumbled last month as central banks ratcheted interest rates up further and investors grew uneasy with softening economic conditions even as inflation eased. The U.S. market as represented by the Standard & Poor’s 500 Index fell 7% in December for a decline of 18.1%, the biggest calendar-year loss since 2008. Non-U.S. stocks also added to their double-digit drops: The benchmarks for international developed and emerging-markets stocks finished the year down 14.1% and 20.5%, respectively.
- Bonds log worst year despite fourth-quarter gains: Taxable and municipal bonds posted their first positive quarter of the year, with the benchmarks up 1.7% and 2%, respectively, for October through December. But their gains were not nearly enough to keep 2022 from being by far the worst year on record for bonds. The Bloomberg Aggregate U.S. Bond Index that serves as a proxy for the taxable bond market ended 2022 down 13.0%, easily its worst year since inception in 1976. Until now, its worst year ever was in 1994 when it dropped just 2.9%.
- Massive government funding legislation beats year-end deadline: President Biden signed into law a $1.7 trillion spending package passed by Congress for fiscal 2023 just ahead of a shutdown deadline, delivering emergency aid for Ukraine, natural disaster relief and election-law reform. It provides the highest-ever level for domestic spending – $772.5 billion, up 9.3% from last year – and $858 billion in defense funding. The omnibus legislation also created Secure 2.0, an expansion of the Secure Act of 2019, designed to enhance retirement benefit plans.
Selected Market Returns
Sources: Morningstar, Altair Advisers
Our Views
- The Federal Reserve remains the single biggest influence on markets entering 2023. The Fed is likely to further reduce the size of its interest-rate hikes to a quarter-point at its next meeting on February 1st after ramping up the fed funds rate from zero to 4.25% over the past 10 months. Beyond this slowing, which we would view as a good sign of the Fed’s caution, we believe a pause in the increases is needed by spring in order to avoid a more severe economic downturn.
- Inflation continued its gradual decline in late 2022, bolstering our belief that it has peaked and will pose less of a problem than it has for the past year. The Fed’s preferred inflation gauge, the core PCE price index, fell to a year-over-year rate of 4.7% in November, down from 5% a month earlier. The deceleration is likely to remain slow, however, given high wage inflation and other factors that will keep the rate from reaching the Fed’s 2% target in 2023.
- U.S. economic data have weakened as expected as interest-rate hikes take effect on the economy with a lag. The risk of a recession in the next 12-18 months has risen, although if one occurs – or is in the process of occurring – we believe it will be mild to moderate given the resilient jobs market and strong consumer spending. Much of the “bad news” is already reflected in today’s battered stock and bond prices.
- Stocks were unusually volatile worldwide in 2022 as a result of high inflation, war in Ukraine and steep rate hikes by central banks. The S&P 500 Index fell 1% or more on 63 trading days, third-most in the last 30 years. More volatility is likely in the months ahead with those issues still unresolved and with the start of fourth-quarter earnings season. However, stocks have typically performed well after inflation peaks and we believe there is a good chance this scenario plays out again in 2023.
- The dollar’s 9% drop over the last three-plus months helped international developed stocks outperform U.S. large caps in 2022 despite the war in Ukraine and resulting energy crunch and economic pullback in much of Europe. Client portfolios are at a full weight to non-U.S. stocks for their portfolio diversification benefits, comparatively low valuations and likely further gains once global economic conditions improve.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice