Fourth Quarter 2022 Update

January 30, 2023

Key Points

• The Federal Open Market Committee (FOMC), in its ongoing effort to aggressively battle stubbornly high inflation, twice raised its federal funds rate target range in the quarter, to 4.25% to 4.50%, from a range of 3.00% to 3.25%.
• The November report showed that employers added 263,000 jobs in the month, and that the unemployment rate was unchanged at 3.7%.
• Stock prices staged a recovery in the fourth quarter following the negative returns posted in each of 2022’s first three quarters.
• The shape of the Treasury yield curve remained in the same inverted shape as compared to that at the end of the third quarter.

4th QUARTER 2022 MARKET COMMENTARY

Below, we’ve highlighted 2022 broad market returns for the fourth quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The US economy posted modest growth in the quarter, but continues to grapple with high inflation, rising interest rates, and slowing employment growth. Within this landscape, the Bureau of Economic Analysis released the third estimate of third quarter 2022 real GDP, with a seasonally adjusted annualized rise of 3.2%, slightly higher than the prior estimate, and an improvement over the 0.6% decrease in the prior quarter. The employment situation continued to be resilient in the quarter, as job gains exceeded expectations. The November report showed that employers added 263,000 jobs in the month, and that the unemployment rate was unchanged at 3.7%. The Federal Open Market Committee (FOMC), in its ongoing effort to aggressively battle stubbornly high inflation, twice raised its federal funds rate target range in the quarter, to 4.25% to 4.50%, from a range of 3.00% to 3.25%. After beginning 2022 at a range of 0% to 0.25%, the increases this year have been the most aggressive undertaken by the FOMC since 1980.

EQUITIES

Stock prices staged a recovery in the fourth quarter following the negative returns posted in each of 2022’s first three quarters. To be sure, there are many speed bumps for equities looking ahead to 2023, including stubbornly high inflation, rising interest rates, and a slowing economy that most economists expect will fall into a recession. But the rise in most broad-based indices during the quarter was a welcome respite for weary investors.  When the 4^th quarter ended, the S&P 500 Index had advanced 7.56% for the quarter but was down 18.11% for the full year. It was the steepest – and only the second – annual decline since 2008.  With that being said, international stocks generated strong results during the quarter—and generally outperformed US equities—with the MSCI EAFE Index of developed markets stocks higher by 17.3%, and the MSCI Emerging Markets Index rising by 9.7%.

FIXED INCOME

Fixed income securities’ prices were, on balance, higher (and yields lower) during the quarter, as investors looked to an easing in inflationary pressures. The FOMC remained aggressive in its attempts to fight inflation, and raised the fed funds rate twice during the quarter. Bond investors projected that the FOMC’s aggressiveness will be enough to bring down persistently high prices. The FOMC raised the target range on the fed funds rate to 4.25%-4.50%, from the prior range of 3.00%-3.25% and the committee indicated that it will remain vigilant in bringing down inflation, and analysts expect additional increases as conditions warrant. The consensus among the committee is that additional hikes are likely in 2023, with the fed funds rate expected to end 2023 at 5.1%.

The shape of the Treasury yield curve remained in the same inverted shape as compared to that at the end of the third quarter. Yields on the very short-term maturities of up to one year rose up to 110 basis points, while yields in the intermediate- and long-term segments of the curve changed between -15 and +15 basis points.

SUMMARY

While the latest quarter’s positive economic growth was a welcome occurrence following two quarters of negative growth, the global economy remains on shaky ground. Stubborn and persistently high inflation remains near 40-year highs, and the aggressive central bank efforts to provide a release valve is moving the economy toward a recession.

In the US, the FOMC is not only aggressively raising the fed funds rate, but is also in the process of unwinding its balance sheet by letting the Treasury and mortgage-backed securities purchased during the long period of quantitative easing mature. The FOMC has stated that it will remain vigilant in fighting inflation, and has indicated that it needs to see more sustained evidence that inflation has abated before considering a rate reduction. Consequently, FOMC policymakers believe the fed funds rate will end 2023 at 5.1%, roughly 50 basis points higher than the current level. However, not all economists are of the opinion that a recession is inevitable. They cite several potential mitigators, such as employers not wanting to lay off staff due to the difficulty of hiring, training and retaining workers in the inevitable economic rebound, and the fact that inflation should naturally come down as year-over-year comparisons in areas such as oil price changes become favorable in 2023.

From the perspective of equity prices, the market will be assessing the prospects for inflation and the economy, and how corporate earnings will be impacted. One of the indicators leaning in favor of stocks rebounding from the negative returns of 2022 is that since 1926 the third year of a presidential term (which is what 2023 will be) has resulted in negative returns only twice, one of which was in the midst of the Great Depression and the other a return of less than -1% in 1939. The third year of a presidential term has the highest median annual return by a significant margin: 22% vs. 11% for the next highest return-year in the term. Of course, stock prices are driven by fundamentals, and expectations thereof, so conditions on the ground will dictate how stocks perform in 2023, but it is possible that stock prices have already discounted a potential recession in 2023.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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