Quarterly Market Insights | Q4 2022
Stocks ended a volatile fourth quarter with a slight gain, which helped repair some of the damage since the beginning of the year.
For much of the quarter, sentiment was boosted by stronger-than-expected earnings, a deceleration in inflation, and a growing belief that the Fed may start to scale back on the pace of interest rate hikes. But the upbeat mood soured in December as recession fears were rekindled by ongoing Fed hawkishness.
The Dow Jones Industrial Average gained 15 percent for the three months, while the Standard & Poor’s 500 tacked on 7 percent. The tech-heavy Nasdaq lagged, slipping 1 percent.1
An October Rally
The quarter opened on a volatile note as stocks reacted to both international news and domestic economic updates. An above-consensus inflation report sent stocks to levels not seen since 2020 before mounting an impressive turnaround that by day’s end had witnessed the Dow Industrials climbing 1,500 points from their midday low.2
The market stabilized as third quarter earnings started rolling in. Early earnings reports calmed some fears of deteriorating profits and pushed Fed policy concerns into the background.
November Follow Through
Stocks added to their gains in November based on growing investor optimism for a slowdown in future rate hikes. After the Federal Open Market Committee (FOMC) announced a 75 basis point rate hike at the start of the month, stocks retreated on hawkish comments by Fed Chair Jerome Powell in his post-meeting press conference. Markets staged a quick recovery, though, following a cooler-than-expected inflation number that ignited a powerful rally that lifted stocks to their biggest one-day gain in two years.3
Stocks opened in December by surrendering some of the October and November gains as recession fears and concerns over higher rates once again dragged on investor sentiment. The Fed announced another rate hike of 50 basis points, but it was the increase in the terminal rate (i.e., the rate at which the Fed stops further rate hikes) that elevated recession worries and closed the quarter and the year on a muted note.
Quarterly Sector Scorecard
Ten sectors notched solid gains for the quarter, but Consumer Discretionary was under pressure (−9.33 percent). Energy (+21.45 percent), Industrials (+18.55 percent), Materials (+14.22 percent), Financials (+12.65 percent), Health Care (+12.17 percent), and Consumer Staples (+11.72 percent) posted double-digit gains. Utilities (+7.62 percent), Technology (+4.96 percent), Real Estate (+2.55 percent) and Communications Services (+0.21 percent) also posted gains.4
What Investors May Be Talking About in January
In the month ahead, expect the market spotlight to fall on three key dates.
The first will come on January 12th with the December Consumer Price Index report. A continued slowdown in inflation may help lift some pressure on the Fed to raise interest rates.5
The second will be on January 26th with the initial reading of the fourth-quarter gross domestic product. A healthy number may be a relief to those worried about an imminent recession, or it could be viewed as a reason for the Fed to maintain its hawkish rate hike path.5
Finally, the FOMC will open its two-day meeting on January 31st. The forward-looking markets tend to focus on what Fed Chair Powell says about the direction of the economy in the post-meeting press conference.5
International markets were flat in December, with the MSCI-EAFE Index checking in with a loss of 0.01 percent.6
European markets trended lower on fears of a difficult winter, with losses posted in Germany (−3.29 percent), Italy (−3.67 percent), France (−3.93 percent), and the U.K. (−1.60 percent).7
Pacific Rim markets were mixed with Hong Kong jumping 6.37 percent on further China reopening steps. Meanwhile, Australia dropped 3.37 percent and Japan fell 6.70 percent.8
Gross Domestic Product (GDP)
The final estimate of third quarter GDP growth was revised higher, from an annualized rate of 2.9 percent to 3.2 percent. The revision was due to an increase in an earlier estimate of personal consumption.9
The economy added 263,000 new jobs in November, a result that was above the consensus estimate of 200,000. The unemployment rate was unchanged at 3.7 percent. Wages rose 0.6 percent for the month, which was double the estimate. Additionally, wages rose 5.1 percent year-over-year, which was above the forecast of 4.6 percent.10
Retail sales fell 0.6 percent as holiday shopping got off to a muted start. It was the biggest decline in nearly a year.11
Output from the nation’s factories, mines, and utilities declined for the second straight month, falling 0.2 percent in November.12
Housing starts fell 0.5 percent, dragged lower by a decline of 4.1 percent in single family home starts. Permits for future home construction slumped 11.2 percent.13
Sales of existing homes dropped 7.7 percent from October and 35.4 percent from the previous year. November’s decline was the 10th straight month of declining sales. Higher mortgage rates combined with elevated home prices kept many would-be buyers on the sidelines.14
New home sales posted a surprise month-over-month increase of 5.8 percent, though year-over-year sales dropped 15.3 percent.15
Consumer Price Index (CPI)
Prices of consumer goods and services rose just 0.1 percent in November and increased 7.1 percent year-over-year. Both figures came in under consensus estimates of 0.3 percent and 7.3 percent, respectively. Core prices (excluding food and energy) also came in slightly lower than expectations. Declines in energy and used car prices more than offset the higher prices for food and shelter.16
Durable Goods Orders
Durable goods orders fell 2.1 percent, pulled lower by a sharp drop in aircraft orders (−36.0 percent).17
In its mid-December FOMC meeting, the Fed approved a hike in its federal funds rate of 0.50 percent, while indicating its plan to raise rates further in 2023 to combat inflation.
In his press conference following the news, Fed Chair Powell suggested that the next hike may be a quarter percentage point increment. FOMC members lifted the terminal rate (i.e., the rate at which hikes would come to an end) to between 5 percent and 5.5 percent, up from their projection of 4.6 percent in September.18
By the Numbers: Retirement Abroad
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, or state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
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The forecasts or forward-looking statements are based on assumptions, subject to revision without notice, and may not materialize.
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.
The Dow Jones Industrial Average is an unmanaged index that is generally considered representative of large-capitalization companies on the U.S. stock market. The S&P 500 Composite Index is an unmanaged group of securities considered to be representative of the stock market in general. The Nasdaq Composite is an index of the common stocks and similar securities listed on the Nasdaq stock market and considered a broad indicator of the performance of stocks of technology and growth companies. The Russell 1000 Index is an index that measures the performance of the highest-ranking 1,000 stocks in the Russell 3000 Index, which is comprised of 3,000 of the largest U.S. stocks. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) and serves as a benchmark for the performance in major international equity markets, as represented by 21 major MSCI indexes from Europe, Australia, and Southeast Asia. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
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4. SectorSPDR.com, December 31, 2022
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13. Reuters.com, December 20, 2022
14. CNBC.com, December 21, 2022
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