2022 Year in Review
The world gave financial markets a lot to process in 2022. The pandemic eased but supply-chain issues that accompanied its arrival remained. Russia invaded Ukraine which created political uncertainty and instability for energy prices. Inflation reached a 40 year high in the US, and central banks around the world raised interest rates unexpectedly fast to combat rising prices.
Against this backdrop, equity and bond markets fell.
Equity Markets
Stocks recorded their worst year since the GFC in 2008. The U.S S&P 500 was down 18% in 2022, which was the seventh worst loss since the 1920s as shown below[i]:
If you only look at last year’s performance numbers, they are not good. But if you look at last year’s performance numbers in the context of the returns that preceded them, the falls become more digestible.
The S&P 500 result follows increases of +31% in 2019, +18% in 2020 and +29% in 2021. Over the past 5 years, the S&P 500 index is still up 42% including the 2022 results.
The Australian ASX300 Index was down 6.1% in 2022, which was relatively good as our market benefited from strong energy prices. Over the past 5 years the ASX300 is still up 23%.
Developed international stocks, as represented by the MSCI World ex USA Index, dropped 14.3% in 2022, while emerging markets declined even further, with the MSCI Emerging Markets Index down 20.1%.
The media has seemingly enjoyed reporting how the large tech stocks performed in 2022.
The FAANGs dropped a combined $3.2 trillion in market value. Facebook parent Meta Platforms, Amazon, Apple, Netflix, and Google parent Alphabet all lagged the broad US market (as shown in the graph below), with Facebook and Netflix suffering particularly sharp losses. The group collectively underperformed the Russell 3000 Index by more than 20%. The slump came on the heels of a stellar decade - the FAANGs returned 28% per year from 2012 to 2021.
Whilst the portfolios we construct for clients do hold FAANG stocks, we purposely hold underweight positions to these stocks. We classify these stocks as ‘growth’ stocks, and over the long-term, we expect them to deliver lower expected returns compared to value stocks, which we overweight in portfolios. Value stocks have prices that are low relative to a measure like a company’s book value.
In recent years the outstanding performance of the FAANGS has meant the ‘value premium’ (outperformance of value stocks relative to growth stocks) has not been evident. But in 2022, value stocks outperformed growth stocks by the largest margin since 2000. The MSCI All Country World Value Index fell 7.5% vs. a 28.6% decline for the MSCI All Country World Growth Index. This helped reduce the magnitude of falls in our client portfolios.
That reversal is a reminder that investors should be cautious about assuming past returns will continue. Even if a company with a track record of strong stock returns remains broadly successful, that may not translate to spectacular future returns. Excellence may now be what investors are counting on and not the basis for above-market returns.
Bond Markets
Inflation was front and centre all year long. The US experienced the highest price increases in four decades, and the Fed lifted rates in a bid to reduce inflation to the long-term target of 2%.
The unexpected inflation (remember the Reserve Bank of Australia Governor saying in 2021 they did not expect any interest rate rises until 2024 at the earliest?) resulted in bond yields increasing and bond prices falling. It was easily the worst year ever for the Bloomberg Aggregate Bond Market Index, which dates back to 1976.
In the 40+ years of calendar year returns there were only four down years before 2022:
1994 -2.9%
2013 -2.0%
2021 -1.5%
1999 -0.8%
The total return of -13% in 2022 was by far the worst ever for this total bond market index.
There has only been one double-digit calendar year fall for 10-year U.S. treasuries since the 1920s. That was an 11.1% fall in 2009. Now we have two.
The tandem decline for equities and fixed interest was rare.
Bond price movements can be complex to understand, but as explained in this article: why-bonds-go-up-and-down, the losses do reverse.
Inflation is also showing signs of moderating. In December, U.S inflation fell 0.1%, driven by lower gasoline prices, which are now lower than 12 months ago. Note Australia only publishes inflation data quarterly, so we will not have our December quarter data until late January.
For 2022, U.S headline inflation was 6.5%, whilst core inflation was 5.7%. In Australia, inflation for the 12 months to 30 September 2022 was 7.3%.
The bond price falls in 2022 have inversely added yield to bond portfolios. Yields for short-to-intermediate-term bonds are now in the 4-5% range.
The other good news is every time we have had tough times in the past, they turned out to be wonderful opportunities for long-term investors.
Expected returns are now higher. Since 1 January 2023, the US stockmarket is up 4.6% and the Australian stockmarket is up 6.4%.
The decade of the 2020s owes us all a good year – let us hope it is 2023.
Best wishes to all for the year ahead.
Author: Rick Walker
[i] https://awealthofcommonsense.com/2023/01/2022-was-one-of-the-worst-years-ever-for-markets/