December capped a generally dismal year for… well, for just about everything, including bonds, stocks and digital currencies – with commodities, the rare asset class, escaping the downturn.
Tech had an especially tough time with the five biggest technology companies accounting for about a quarter of the total US stock market decline (Wall Street Journal, Jan. 2). This was reflected in a dramatic divergence in returns between the Dow Jones and the Nasdaq, with the former down -4.17% for the month and -8.78% for the year and the latter down -8.73% and -33.10%, respectively (CNBC, Dec. 30). Comparable numbers for the S&P 500 were -5.90% and -19.44%.
The mid-month Federal Reserve meeting offered a modest respite from the drumbeat of four consecutive 75 basis point increases to the Federal Funds rate. While the Fed moderated the pace of its historically aggressive tightening with a 50 basis point bump, it was accompanied by a hawkish caveat from Chairman Powell that we “we still have some ways to go” (Bloomberg, Dec. 14). Speculation settled on an end rate of somewhere north of 5.0% in 2023 even as the debate over the possibility of a “soft landing” went on.
On the plus side of the ledger, inflation showed further signs of abating as we headed towards year-end. While November’s 7.1% rise (annualized) in the Consumer Price Index would not normally be seen as good news, it was down substantially from 7.7% the month before and well below June’s 9.1% peak. Core CPI, excluding energy and food, climbed 6.0% on an annualized basis in November, down from October’s 6.3%. Month to month, core CPI rose 0.2% in November, down from 0.3% the month prior (Wall Street Journal, Dec. 13).
The dollar ended the year up about 8.9% as measured by the Wall Street Journal Dollar Index, but down from its September highs. It was the biggest yearly gain since 2014 (Wall St. Journal, Dec. 29). The global currency deck saw a constant reshuffling during the year, with the euro dropping below dollar parity in July and the British pound reaching is lowest point against the dollar in 200 years in September (Wall St. Journal, Sept. 26). The Bank of Japan surprised investors by changing its yield curve control policy to allow the yield on the 10-year Japanese Government Bond to fluctuate 0.5% around its 0% target, double its previous 0.25% band. The yen rose on the news (Wall St. Journal, Dec. 20).
One bright spot was merger arbitrage funds (Arb) which generally outperformed the broad market averages. Arb spreads – the difference between a target company’s market price and its acquisition (deal) price -– rose to as high as 18% in July from 9% to start the year as both market and regulatory concerns weighed. By year end, that number had settled to around 12% as reported by Bloomberg, citing data from Alpharank.com (Bloomberg, Dec. 16).
An ongoing mystery continues to be the strength in the jobs market, something the Fed has been watching closely. The November employment report from the Labor Department showed a gain of 263,000 jobs and an unemployment rate of 3.7%, with average hourly earnings up 5.1% from a year earlier (Wall St. Journal, Dec. 2). This was roughly on a par with the previous three months. As has been the habit, stocks fell immediately following the report though a rally later in the day brought the averages back to nearly flat (Wall St. Journal, Dec. 2).
The December report, out January 6, was slightly ahead of expectations with 223,000 jobs added, the weakest gain for two years (Bloomberg, Jan. 6). The unemployment rate fell to 3.5%.
A record, then not
The first day of the 2022 trading year ended with the S&P 500 at a record high, something that had not happened since 1977 (Yahoo Finance, Dec. 30). The yield on the 10-year treasury stood at 1.63%. The year’s final trading day ended with the S&P off -0.25% on the day and -19.4% on the year, with the 10-year bond yielding 3.87%. Lost, possibly, in what was the worst US stock market performance since 2008, was the fact that both the Dow and the S&P finished 4Q 2022 in the black (CNBC, Dec. 30).
What that may portend, if anything, remains to be seen, but what is clear is that some of the main topics that dominated 2022 – inflation, the Fed, market volatility – will be making the leap into 2023 with us.