Market Insights: Fourth Quarter 2022

Surging Interest Rates and Decades-High Inflation Weigh on Stocks and Bonds in 2022

2022 was the most difficult year for investors from a return and volatility standpoint since the Global Financial Crisis. Multi-decade highs in inflation, sharply rising interest rates, geopolitical unrest, and concerns about future economic growth pressured both stocks and bonds. The S&P 500 posted its worst performance since 2008 while major benchmarks for both stocks and bonds declined together for the first time since the 1960s, punctuating just how disappointing the year was for investors.

To start the fourth quarter, both stocks and bonds enjoyed solid gains in response to data implying inflation pressures were beginning to ease. While inflation remained far too high on an absolute level, markets hoped these declines would result in the Federal Reserve not raising interest rates as high as previously feared. Investor optimism faded in December as global central banks signaled that they were still committed to aggressively hiking rates, economic data showed clear signs of slowing growth, and several negative earnings announcements raised concerns of a recession in 2023. As a result, the S&P 500 dropped from mid-December on, ending the year with declines of almost 20%. The tech-heavy, Nasdaq Composite, was down well over 30%.

As we start the new year, we should expect financial media commentary to be focused on the 2022 losses and current market risks, including slowing growth concerns and recession fears. But the market is a forward-looking instrument, and while there are undoubtedly economic and corporate challenges ahead, some of those best-known risks are partially priced into markets already, and the truth is that there are potential positive catalysts lurking.

First, inflation has shown definitive signs of peaking and declining. The Consumer Price Index (CPI) has fallen well off its highs in June, while other key inflation metrics have registered significant declines. To be clear, inflation remains much too high at 6.5% year-over-year, but if price pressures ease faster than expected, that will present a positive surprise for markets in 2023. Second, after a historically aggressive Fed rate-hiking campaign in 2022, the Federal Reserve has signaled that it expects to wind down its current hiking cycle by mid-year. This will remove a significant headwind from asset prices. Finally, while both economic growth and corporate earnings are expected to decline in 2023, if the economy or corporate America proves to be more resilient than forecasts, it could provide a positive spark for markets.

The Primoris Wealth Advisors Team