December 2022 Stock Market Commentary
Ethan Pollard | January 06 2023
Markets sold off in December to cap a year to forget for investors, with both stocks and bonds declining in the final month of 2022.
The S&P 500, a broad benchmark for large cap US stocks, fell -6% in December to close the year down -18%.
Overseas equities lost just -1% this month with the MSCI ACWI ex-US index booking a -16% full-year return, marking the first year since 2017 that international stocks outperformed their domestic counterparts.
Within fixed income, the Barclays US Aggregate Bond index fell -0.5% for a -13% return on the year, by far the worst showing for the index since its inception in 1976.
Commodity prices were amongst the few winners on the year, with the Bloomberg Commodity Index gaining +16% in 2022 despite a -2% decline in December.
For the last time in 2022, we examine our proprietary Three Dials readings, all of which were unchanged during the month of December as we summarize below:
- Market Sentiment and Momentum: (Neutral ➖)
Despite the shaky end to the year for equities, we saw encouraging technical support on the S&P around the 3,800 level, a sign that the index may be ready to put the woes of 2022 behind it and seek greener pastures in 2023.
That said, we still can’t rule out a re-test of the October lows, which leaves our Momentum Dial in a “Neutral” position at year-end.
- Economic Fundamentals: (Negative ➖)
While inflation dominated headlines for the better part of 2022, moderating CPI data in the fourth quarter should offer encouragement that the Fed’s current path of rate hikes has done its job so far.
On the other hand, sectors like manufacturing and housing have slowed meaningfully with higher borrowing costs, putting a drag on overall economic activity.
While any potential recession to come would likely be relatively tame thanks to a still strong labor market, our Economic Dial remains in a “Negative” position.
- Valuation: (Neutral ➖)
Valuations were largely unchanged during December, with falling stock prices offset by lower earnings estimates, as analysts are now expecting corporate earnings to fall -3% in the fourth quarter.
P/E ratios remain roughly in-line with long-term averages, leaving our Valuation Dial in a “Neutral” position at year-end.
Heading into the new year, we continue to take a Slightly Defensive approach, with two dials showing a Neutral position while one dial remains fully Off.
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