The big picture: 2022 reviewed

Coming up, we summarize how 2022 played out and what this data tells us for the current year.

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From Thrivent Asset Management, welcome to episode 43 of Advisor’s Market360™. A podcast for you, the driven financial advisor.

Welcome to a new year of Advisor’s Market360! We hope our listeners had a restful break over the holidays and are ready for the journey ahead. Whatever 2023 has in store, we aim to help advisors feel prepared and confident by connecting you to insights from the experts at Thrivent Asset Management. We look forward to another year of sharing relevant views on market events and giving you a virtual seat at the table as we talk shop with portfolio managers.

Now, let’s get to it. With 2022 in the pages of history, we would be remiss if we didn’t take this opportunity to flip back and review how the markets and economy concluded the year. How did 2022 end, and what themes have carried over into 2023? As is often the case, we turned to Steve Lowe, CFA, Thrivent’s Chief Investment Strategist, to break down the numbers and trends of 2022, particularly the fourth quarter.

If you’re looking for Lowe’s short version, the fourth quarter was much like rest of 2022 – dominated by inflation and the policies of the Federal Reserve, or Fed. And the combination of two themes – rising prices and a tightening monetary policy – contributed to a slowing economy, rapidly rising interest rates, and significant losses in the stock market. The war in Ukraine also contributed to global economic adversity, particularly in Europe.

That’s just the short version. Next up, some greater detail as we unpack all of this in the medium-length version. Then, after that, we’ve got a “long, but not too long” deep dive into the numbers.

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The Fed raised rates 0.5% in December 2022, bringing the total increase for the year to 4.25%. The hikes have helped slow the economy, while raising rates on credit cards and other debt. Rising mortgage rates have also put a damper on home sales. 30-year mortgages climbed more than 3% during 2022, ending the year at almost 6.5%.

On the flip side, Lowe said that savers and investors are now earning a better return on their savings and bond investments, with yields climbing more than 2% on 10-year Treasuries. Fed Chair Jerome Powell has indicated that the rate hikes will continue until inflation is under control, with more increases expected during the first two quarters of 2023.

While inflation continues to impact the economy, the Fed’s monetary tightening efforts have started to have an effect on prices. Excluding food and energy, the Consumer Price Index, a common measure of inflation, increased just 6% over the course of 2022.

Employment has remained strong, with job growth reaching 24 consecutive months in December. However, wage growth has slowed, with average earnings increasing by just 0.3% in December.

Higher interest rates have affected the once-thriving manufacturing sector. Manufacturing activity declined in December for the second straight month after 30 consecutive months of growth, according to the Institute for Supply Management.

That’s it for the medium-length version of our review. But, no doubt you want more – more details, more insights and more ways to turn the information into action. Your wish is our command.

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First up on our deep dive review of 2022 are U.S. stocks.

The S&P 500^®, the index that represents the average performance of a group of 500 large-cap stocks, was up just over 7% in December but was down 19.4% for 2022.

The tech-heavy NASDAQ, an electronic stock exchange with more than 3,300 company listings, had a very rough year – down 33.1% for 2022.

Favorable changes in the market over the past year include the demise of extreme speculation; the re-emergence of quality, value, and dividend factors as positive characteristics for valuation; and the broader differentiation of returns across sectors.

What about this year, then? According to Lowe, value stocks, and even some international sectors of the equity market, seem positioned for a relative performance advantage this year. Small-cap valuation looks attractive, with small caps poised to outperform likely later in 2023 as cyclical headwinds turn to tailwinds. Quality growth stocks have trailed, but likely would benefit from falling rates and a scarcity of growth in a slowing economy.

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As we look at retail statistics, total sales for the three-month period of September through November were up 7.7% from the same period a year ago. For all of 2022, bars and restaurants, building materials sales and online retail saw the biggest gains. Auto sales were up just slightly, and department store sales slipped 3% from the prior year.

Turning our attention to the job market, the economy added 223,000 new jobs in December bringing the total job growth for 2022 to 4.5 million jobs – this according to the Employment Situation Report issued January 6th by the Department of Labor. The unemployment rate dropped to just 3.5% in December, matching a 54-year low, as more individuals entered the work force.

While wages continued to rise, they increased by just 0.3% in December. Over the past 12 months, wages have increased by 4.6%.

Although these statistics continue to point to a very tight jobs market, there is anecdotal evidence of moderating labor demand. Layoff announcements are accumulating – especially in the previously hot technology sector. Lowe believes that, if this development becomes more entrenched, the risk of recession increases.

Next, we look at the 11 sectors of the S&P 500. The big winner here was the Energy sector, which was up over 65% during 2022. And the Utilities sector eked out an increase of just over 1.5% for the year. All other sectors finished in negative territory. Sectors falling the furthest were Communications Services, down almost 39%, and Consumer Discretionary, down just over 37%.

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One benefit of the Fed raising rates persistently throughout the year is that bond yields rose significantly in 2022. The yield on 10-year U.S. Treasuries climbed more than 2% up to 3.88% at the close of 2022. For investors, these higher bond yields are somewhat of an alternative to equities in the short term, given the continuing uncertain environment for higher risk assets.

In the fourth quarter of 2022, corporate earnings projections for the S&P 500 declined just over 2.6% as the monetary tightening polices of the Fed continued to take the air out of the economy. But for the year, the forward 12-month projected earnings edged up almost 3.2%. However, declining confidence in corporate earnings will dampen the near-term outlook for the equity market.

The forward 12-month price-earnings ratio, or P/E, of the S&P 500 fell to 16.65 at the close of 2022. A lower P/E means stocks are less expensive relative to their earnings per share. But the downward trend in corporate earnings expectations has contributed to the declining valuations in stock prices. Corporate management teams will continue to be challenged to deliver strong profit results in a softening macro environment.

Looking at the inverse of the P/E, the forward 12-month earnings yield for the S&P 500 ended the year at 6%. That’s well above the 4.77% at the close 2021. Lowe and his team use this measure to help compare equity earnings yields with current bond yields. Although bond yields have increased significantly this year, the 6% earnings yield is still well above the 3.88% market rate of 10-year U.S. Treasuries.

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After reaching a 20-year high versus the Euro and Yen, the dollar retreated in the fourth quarter of 2022 against both currencies. The Euro appreciated just shy of 9% versus the dollar for the quarter. The dollar also dropped versus the Yen in the fourth quarter, depreciating just over 8.8%.

Looking back at oil prices, after a mid-year spike, they remained fairly stable through the fourth quarter as the global economy slowed. Gasoline prices ended the year lower than they started. The average price per gallon dropped about 16.4% in the fourth quarter to end the year at $3.20 per gallon.

As for the price of gold: after a strong fourth quarter, gold ended the year almost exactly where it started. Gold was up just over 9.2% in the fourth quarter to end the year at $1,826.20 per ounce – just $2.40 below its 2021 closing price.

And last but not least, international equities had a strong fourth quarter, as the MSCI EAFE Index rallied 17%. As a reminder, this is the index that tracks developed-economy stocks in Europe, Asia, and Australia. But for the year, the index experienced a decline similar to the U.S. market, as economies around the world were stymied by the effects of rising inflation. For the year, the index was down almost 16.8%.

Looking ahead, the way Lowe sees it, some international sectors of the equity market seem positioned for a relative performance advantage in the coming year.

And that’s it! We hope you found this 2022 review helpful and have picked up a few insights you can use throughout 2023.

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Thanks for listening to this episode of Advisor’s Market360™. All episodes are available on Apple Podcasts, Spotify, and Google Podcasts. Email us at podcast@thriventfunds.com with your feedback, questions and topic suggestions for future episodes. Advisors: do you have a story you’d like to hear included in a future episode? Email us at podcast@thriventfunds.com. As always, you can learn more about us at thriventfunds.com and find other insights of interest to you, the driven financial advisor. Bye for now.

(Disclosures)

All information and representations herein are as of January 10, 2023, unless otherwise noted.

Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.

Past performance is not necessarily indicative of future results.

Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Thrivent Asset Management, a division of Thrivent, offers financial professionals a variety of investment products to help meet their clients’ needs. Thrivent Distributors, LLC, is a member of FINRA and SIPC and a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.