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Montecito Capital Management, Investment Advisors


Year-end 2022 Stock Market Recap: Expectations and Returns

12/31/2022

 
2022 brought a tumultuous year with significant losses across asset classes spurred by seven rate hikes by the Fed, 40-year high inflation, recession worries, geopolitical tensions, and supply chain disruptions. It is no surprise that stocks fell far more than the worst possible outcome forecast by Wall Street and marked the largest broad market equity decline since 2008. Market volatility was also elevated on the year with the S&P 500 dropping over -5% on four monthly occasions and jumping +5% on three monthly occasions. Given the many headwinds, it is also not surprising the S&P 500 dropped into bear market territory (> -20%) on three different periods in 2022. The biggest equity market index loser for the year was the tech-laden Nasdaq which plummeted -33%, followed by the S&P 500 which delivered a total return of -18%. Even the Aggregate US Core Bond index was clobbered with a record setting -13% loss in 2022. 
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Looking back to our 2022 Market Outlook, we outlined many headwinds and negative return probabilities: “we have lower expectations than past years and expect choppy U.S. equity markets... with downside risk of -9%. For perspective, the past few years we did not foresee downside volatility and therefore did not provide a range-bound forecast.” Further, we noted “risk is elevated by headwinds in the form of rising prices, higher cost of money (rates higher), slower economic growth and no more Fed or Government stimulus in play. The 2022 investment environment is further compounded with unknowable outcomes related to the potential for new lethal virus variants and escalating geopolitical risks, particularly Russia & China.” 
 
With respect to some highlighted investment strategies in last year’s “2022 Equity Market Forecast” we noted: “Rising rates and inflation have an inverse impact (loss) on bond prices. Therefore, we will look to reduce traditional fixed-income allocations, which also have already partly been executed to some degree and look to replace with treasury inflation-protected securities (TIPs). We will also increase asset class exposure to real assets (gold, commodities, and real estate), loss buffer ETFs, absolute-return funds, along with increasing specific stock/sectors plays.”
 
In hindsight, a good amount of our 2022 cautionary investment thesis was on point with cutting fixed income while adding to our liquid alternative funds and real assets, including sharply overweighted positions in commodities (COMT) and energy (XLE). We also took several risk-off tactical portfolio adjustments to client portfolios in the first quarter (Q2FY22) as early inflationary signs appeared more robust and stickier than the Fed and Treasury were conveying.
 
Our top four equity allocations were liquid alternative funds which we coined as the “four horsemen” and which overall delivered a meaningful asset class gain that was instrumental to client portfolios:  Catalyst/Millburn Hedge Strategy (+7.7%), Standpoint Multi-Asset Investor (+3.4%), Grant Park Multi Alternative Strategies (-1.9%) and Campbell Systematic Macro (+30.6%).  During the year we upped our allocations to each one of these four horsemen into the 4-5% range. Assuming an overall 20% allocation to these four horsemen, then these overweight positions brought an amalgamated positive return attribute of +2% to the client portfolios on the year. Similarly, our outsized allocations to energy and commodities, up +64% and +19% respectively, brought additional resiliency during these turbulent times.

Weekly Stock Market Recap I S&P 500 Monthly Summary Dec 2022

12/3/2022

 

December 23, 2022, Weekly Equity Market. The S&P 500 broad US equity market index logged its third straight weekly decline (-0.2%) on resilient economic news, which gave little hope for a pause in near-term rate increases by the Federal Reserve. The number of Americans filing for initial jobless claims came in lower than expected, rising by 2K to 216K compared to the anticipated 225K. The data showed that the labor market continued to remain stubbornly resilient. The final measure of third quarter GDP growth was also revised upward to 3.2%, more than the expected 2.9%, signaling a robust economy despite the Fed's aggressive rate hikes. Furthermore, growth metrics and stronger consumer confidence fueled investor worries over a hawkish Fed heading into next year. 


December 16, 2022, Weekly Equity Market. As hope fizzled for a Fed pivot to a more dovish rate hike outlook, the S&P 500 fell 2.08% for the week and moving its December losses at 5.58%. Similarly, the Dow and Nasdaq slid 1.7% and 2.7%, respectively. Indeed, Federal Reserve Chair Jerome Powell made it clear this week that rate cuts aren’t in the cards. The federal funds rate has moved to a new range of 4.25% and 4.5%, marking the highest level since December 2007. The 50-basis point rate hike comes after the Fed raised rates by 75 basis points at each of the past four policy meetings – the fastest clip since the 1980s. The Fed left in the statement wording that it anticipates “ongoing increases” in interest rates, implying it does not intend to pause rate hikes in March. Chair Powell continued to reiterate that the labor market needs to see higher unemployment. This sentiment is driving Wall Street's growing concern about an over-aggressive rate policy because the unemployment rate is considered a lagging economic indicator of Fed action.  Powell comments also included "have a long way to go to get back to price stability." Fed officials now see raising the benchmark interest rate to a peak of 5.1% in 2023, an extra 50 basis points over the previously projected 4.6% back in September.

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December 9, 2022, Weekly Equity Market Recap. For the week, the S&P 500 declined 3.4%, the Dow shed -2.8% and the Nasdaq dropped 4%.  U.S. producer prices rose slightly more than expected in November with PPI ticking up by + 0.3% for the month and 7.4% from a year ago.  The news reconfirmed inflation still is hurting the economy and set the stage for the Fed rate hike on the 14th of the month to be 0.5%-0.75%.  However, job-listing website Indeed said wage growth for November has eased by almost one-third compared to the March peak and is on track to return to pre-pandemic levels in late 2023.


December 16, 2022, Weekly Equity Market. As hope fizzled for a Fed pivot to a more dovish rate hike outlook, the S&P 500 fell 2.08% for the week and moving its December losses at 5.58%. The Dow and Nasdaq slid 1.7% and 2.7%, respectively. Indeed, Federal Reserve Chair Jerome Powell made it clear this week that rate cuts aren’t in the cards.  The federal funds rate has moved to a new range of 4.25% and 4.5%, marking the highest level since December 2007. The 50-basis point rate hike comes after the Fed raised rates by 75 basis points at each of the past four policy meetings – the fastest clip since the 1980s. The Fed left in the statement wording that it anticipates “ongoing increases” in interest rates, implying it does not intend to pause rate hikes in March. Chair Powell continued to reiterate that the labor market needs to see higher unemployment. This sentiment is driving Wall Street's growing concern about an over-aggressive rate policy because the unemployment rate is considered a lagging economic indicator of Fed action.  Powell comments also included "have a long way to go to get back to price stability." Fed officials now see raising the benchmark interest rate to a peak of 5.1% in 2023, an extra 50 basis points over the previously projected 4.6% back in September.

December 2, 2022, Weekly Equity Market Recap. All major US equity indexes finished higher for the week led by the Nasdaq +2.1%, followed by the S&P 500 +1.1% and Dow Jones +0.2%. Stocks were lifted when the Federal Reserve Chair Jerome Powell set the table for a lower than expected 50-basis point rate hike at the Fed's December policy meeting (versus 0.75%), saying in a speech on Wednesday it makes sense to "moderate" rate hikes as the Fed approaches its estimated peak in benchmark interest rates.  Powell also commented “The time for moderating the pace of rate increases may come as soon as the December meeting.” However, stocks retrenched a bit from their weekly highs after the November jobs report came in hot with Payroll rising by 263,000, holding the unemployment rate at 3.7%. The Department of Commerce reported that the core personal consumption expenditure (PCE) price index (excluding volatile food and energy items) – the favorite inflation gauge of the Fed – increased 0.2% in October compared with 0.5% in September.

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