An Initial 2022 Focus: Balancing Acts
We began 2022 with an outlook focused on Balancing Acts reflecting a wider range of potential outcomes.
These Balancing Acts included:
Considering all of this, consumers remained engaged, sustained – to a good degree by excess savings acquired during the pandemic and a strong job market.
As we made our way through the year, it became increasingly clear that a number of imbalances were driving higher inflation, volatility, and a bear market in equities.
While the omicron wave was significant, the fast-spreading variant faded pretty quickly, and the world’s economy continued its reopening. The reopening, however, was tougher than expected. This was further aggravated when Russia invaded Ukraine on February 24. In addition to the human tragedy, the war sent energy and food prices higher.
China’s pandemic troubles and tense relations with the U.S. aggravated supply chain issues further. China maintained a “zero-COVID” policy throughout the year, shutting down factories and other businesses when COVID cases appeared.
“… despite negative GDP growth in the first half of the year, the economy is expected to have grown 1.9% in 2022 compared to 2021 and seems to have avoided a recession.”
The Fed became increasingly hawkish through the year, increasing the fed funds rate from 0.00%–0.25% to 4.25%–4.50% and modestly reducing its balance sheet from almost $9 trillion to $8.6 trillion. The Fed’s goal has been to bring down inflation while not severely impacting employment and the economy. And despite negative GDP growth in the first half of the year, the economy is expected to have grown 1.9% in 2022 compared to 2021 and seems to have avoided a recession.
The job market remained tight throughout the year. Unemployment sat at 4% in January, fell to a low of 3.5% in July, and rose to 3.7% in November. Wages grew 5.1% over the year ended November 2022 and are forecasted to have grown 5.2% for the full year.
Finally, the consumer was engaged despite a decline in sentiment. Retail sales were up 8.7% year-to-date through November. Interestingly, the consumer had over $2 trillion of excess savings at the beginning of the year, much the result of government stimulus and support, and is estimated to have spent down $1.2 trillion to end the year close to $0.9 trillion. So far, the Fed may be succeeding at a “soft landing.”
After a strong 2021 anchored on robust earnings growth (50% in 2021, compared to 2020), U.S. equity markets fell in 2022, with the S&P 500 returning -18.1% and the Russell 1000 returning -19.1%, both on a total return basis. With rising rates tied to tighter Fed policy, longer-duration equities, like tech stocks, experienced more severe losses. The tech-heavy Nasdaq Index was off -32.5% for the year, and the Russell 1000 Growth Index, which has a tech overweight compared to the broad market, returned -29.1%. Small cap stocks, as measured by the Russell 2000 Index, returned -20.4% for the year. With tighter Fed policy and higher rates, earnings growth slowed materially, forecasted to be only 5.1% for 2022 compared to 2021.
Non-U.S. market returns were mixed but outperformed those of the U.S. For the year, the MSCI EAFE Index, representing non-U.S. developed markets, returned -14.5%. Europe’s geographic proximity and greater economic ties to Russia, especially its reliance on energy, led to high inflation and a slowing economy. As measured by the MSCI EM Index, emerging markets returned -20.1%, driven mainly by developments in China. The Chinese government imposed zero-COVID policies throughout the year, also imposing regulations to limit the commercial reach of mainland tech companies. The MSCI China Index was down -21.9% in 2022, but rallied in the fourth quarter on signs that China is loosening its zero-COVID stance.
Bond yields rose to their highest levels in more than a decade, driving prices lower. The 10-year Treasury yield opened the year at 1.51% and rose as high as 4.24% before settling at 3.87% at the end of the year. The aggressive monetary policy tightening led to an inverted curve, with the two-year Treasury yield ending the year at 4.43%. The Bloomberg U.S. Aggregate Index, representing investment-grade taxable bonds, returned -13.0% for the year, the lowest calendar year return since the index’s inception in 1976. The Bloomberg U.S. Municipal Bond Index, representing investment-grade municipal bonds, returned -8.5%. As measured by the Bloomberg Corporate High Yield Index, high-yield bonds were down -11.2%.