After an exuberant 2021 that saw widespread Covid-19 vaccine distribution and some return to normalcy, 2022 was mired by a series of challenges and uncertainty. The Federal Reserve, slow to act on rising inflation, enacted the most aggressive tightening cycle seen since the early 1980s. [l] As if that were not enough, Russia invaded Ukraine, which surprised the world and contributed to skyrocketing energy prices, especially in Europe. China’s strict Covid-19 lockdown policies exacerbated supply chain issues and inflation.
Markets were down strongly through the first three quarters of the year. However, some light was at the end of the tunnel in the fourth quarter. Inflation readings moderated somewhat and came in lower than the June peak. [2] Third quarter US GDP recovered to 2.6% after two negative quarters in a row [3]. Stocks rebounded in a big way but were still down for the full year.
Value led the way across global equities both in the fourth quarter and for the year. In the US, fast-growing technology companies, which had been the darlings of the market since 2020, felt the pain of rising rates the most–Meta plunged 64% for the year, while Netflix fell 51 %. [4] Technology stocks fell 31.5%, their biggest decline since 2008. [5] While value stocks were down for the year, they fell much less than growth stocks-for large cap US stocks, value held a more than 21 % advantage over growth in 2022.
The other major story of the fourth quarter was international stocks outperforming US stocks by a wide margin. They staged a double-digit rally in the fourth quarter, helped by a more than 7% drop in the dollar versus a basket of international currencies. [6] International developed stocks ended up being the most resilient of the major stock categories in 2022 and outperformed large cap US stocks for the first time since 2017. [7] Emerging markets, weighed down by the challenges of increased Chinese regulation of its private sector, and sporadic lockdowns, rallied in the fourth quarter but not to the same extent.
Rising yields, which plagued bond returns for much of the year, fell in the second half of the fourth quarter, and major bond indices were positive across the board, led by the higher yielding sectors. Still, 2022 was the worst year for investment grade bonds since the inception of the Bloomberg US Aggregate bond index in 1977. [8] The silver lining going forward is that bonds, which provided little in terms of yield for much of the last decade, are now offering meaningful income, an important component of bond returns. That should bode well for future bond market performance.
While 2022 was a year of challenges, it reinforced important principles for long-term investors. The resurgence in the relative performance of value and international stocks reminds us not to concentrate our portfolios in the latest fads or hot performers but to maintain a disciplined and diversified asset allocation suited to our long-term goals. 2022 will go down as a very bad year for investors, but that does not change the long-term outlook for markets that go up over time.
[1] Cox, Jeff. “Fed Approves 0.75-point Hike to Take Rates to Highest Since 2008 and Hints at Change in Policy Ahead.” CNBC, 3 Nov. 2022, www.cnbc.com/2022/11/02/fed-hikes-by-another-three-quarters-of-a-point-taking-rates-to-the-highest-level-since-january-2008.html. Accessed 5 Jan. 2023.
[2] Cox, Jeff. “Consumer Prices Rose Less Than Expected in November, up 7.1% From a Year Ago.” CNBC, 13 Dec. 2022, www.cnbc.com/2022/12/13/cpi-inflation-november-2022-.html. Accessed 5 Jan. 2023.
[3] Cox, Jeff. “U.S. GDP Accelerated at 2.6% Pace in Q3, Better Than Expected as Growth Turns Positive.” CNBC, 27 Oct. 2022, www.cnbc.com/2022/10/27/us-gdp-accelerated-at-2point6percent-pace-in-q3-better-than-expected-as-growth-turns-positive.html. Accessed 5 Jan. 2023.
[4] WSJ print edition, “Big Tech Stocks Fall From Glory”. Pages R1 and R3.
[5] Lauricella, Tom. “Just How Bad Was 2022’s Stock and Bond Market Performance?” Morningstar, Inc., 4 Jan. 2023, https://www.morningstar.com/markets/just-how-bad-was-2022s-stock-bond-market-performance. Accessed 5 Jan. 2023.
[6] Source: Morningstar. Data as of 12/31/2022.
[7] Source: Morningstar. Data as of 12/31/2022. S&P 500 Index used for US large cap stocks. MSCI EAFE NR USD used for International stocks.
[8] Goodkind, Nicole, et al. “Goodbye 2022 – and Good Riddance. Markets Close Out Their Worst Year Since 2008.” CNN, 30 Dec. 2022, edition.cnn.com/2022/12/30/investing/dow-stock-market-2022/index.html. Accessed 5 Jan. 2023.
Important Disclosures
Team Hewins, LLC (“Team Hewins”) is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.
The volatilities of any comparative indices included in this presentation may be materially different from the individual performance attained by a specific client in a Team Hewins strategy. In addition, client holdings may differ significantly from the securities that comprise the indices. The indices have not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather are disclosed to allow for comparison to the performances of certain well-known and widely recognized indices. The indices are unmanaged, include reinvestment of dividends, capital gain distributions or other earnings and do not reflect any fees or expenses. Indices cannot be invested in directly. Set forth below are descriptions of the indices included in the presentation.
Past performance is not an indication of future returns. Comments provided herein reflects Team Hewins’ views as of the date of this write up and are provided for informational purposes only. Such views are subject to change at any point without notice. Some of the information was obtained from third party sources believed to be reliable but the information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. Due to various risks and uncertainties no reliance should be placed on any such statements or forecasts when making any investment decision. Nothing presented herein is or intended to be investment advice or a recommendation to buy or sell any securities and no investment decision should be made based solely on the information provided. Team Hewins is not responsible for the consequences of any decisions or actions taken as a result of information provided in this writeup and does not warrant or guarantee the accuracy or completeness of the information. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses.
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Index Descriptions
- S&P 500 Index (Large Cap U.S. Stocks): measures the performance of large capitalization U.S. Stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, NYSE MKT, and NASDAQ. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value.
- Russell 1000 Growth Index (Large Cap U.S. Growth Stocks): measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
- Russell 1000 Value Index (Large Cap U.S. Value Stocks): measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
- Russell 2000 Index (Small Cap U.S. Stocks): An unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index, representing approximately 10% of the total market capitalization of that index and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group owns the Russell Index data, including all applicable trademarks and copyrights.
- Russell 2000 Value Index (Small Cap U.S. Value Stocks): measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
- Russell 2000 Growth Index (Small Cap U.S. Growth Stocks): measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
- MSCI EAFE Index (International Developed Stocks): The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
- MSCI EAFE Value Index (International Developed Value Stocks): The MSCI EAFE Value Index captures large and mid-cap securities exhibiting overall value style characteristics across Developed Markets countries around the world, excluding the US and Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
- MSCI EAFE Growth Index (International Developed Growth Stocks): The MSCI EAFE Growth Index captures large and mid-cap securities exhibiting overall growth style characteristics across Developed Markets countries* around the world, excluding the US and Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
- MSCI Emerging Markets Index (Emerging Markets Stocks): is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 25 emerging countries around the world.
- MSCI Emerging Markets Value Index (Emerging Markets Value Stocks): The MSCI Emerging Markets Value Index captures large and mid-cap securities exhibiting overall value style characteristics across 25 Emerging Markets (EM) countries.
- MSCI Emerging Markets Growth Index (Emerging Markets Growth Stocks): The MSCI Emerging Markets Growth Index captures large and mid-cap securities exhibiting overall growth style characteristics across 25 Emerging Markets (EM) countries.
- Bloomberg Barclays US Aggregate Bond Index (Investment Grade U.S. Bonds): includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.
- Bloomberg Barclays Muni Bond Index 1-10 Yr Blend (1-12) (Int-Term Municipal Bonds): A market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index. The 1-10 Year Municipal Blend index tracks tax-exempt municipal General Obligation, Revenue, Insured, and Prerefunded bonds with a minimum $5 million par amount outstanding, issued as part of a transaction of at least $50 million, and with a remaining maturity from 1 up to (but not including) 12 years.
- ICE BofA Merrill Lynch U.S. High Yield, BB-B Rated, Constrained Index (High Yield U.S. Bonds): Tracks the performance of US dollar-denominated below-investment-grade (BBB rated) corporate debt publicly issued in the US domestic market. Qualifying bonds are capitalization-weighted provided the total allocation to an individual issuer does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis.
- JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds): The JP Morgan EMBI Global Diversified is a uniquely weighted index that tracks total returns for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. The index limits the weights of countries with larger debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.