January 2023

Year End Review of 2022

The Abbreviated Review

With the notable exception of energy, almost all markets were down in 2022. The Bloomberg U.S. Aggregate Bond Index, which goes back to 1970, had its worst performance ever! The index showed bonds down 13% for the year. The next closest down year was 1994, when bonds were down 2.9%. The S&P 500 Index was down 19% for this past year. In short, this was a very bad year for investors. If there is any solace, it’s that at the end of 2022 the S&P 500 was up 2.2% from where it began in 2021. In many ways the performance in 2022 was a giveback of gains from 2021.

A look at what happened

There was a confluence of economic storms that lead to the 2022 results. First, inflation began to increase at an unacceptable rate in late 2021. This occurred for several reasons. The U.S. government made the mistake of giving away money in the early part of the year that turned out not to be needed by many recipients. This money was then spent on goods and services. Demand went up, logistical issues reduced supplies and inflation increased. Next, a mismatch between the need for workers and the lack of workers willing to work resulted in substantial salary increases, thereby driving inflation higher. As the cost for workers rose companies needed to raise prices to cover the added costs to provide goods and services the public wanted.

Enter the Federal Reserve (FED), who wanted inflation at around 2%, while it was running at 5% in November of 2021 to 9.1% peak in June. To counter inflation, the FED kept increasing the discount rate, making the cost of borrowing money more and more painful. To date, it has not had an impact on unemployment, however mortgage interest more than doubled bringing the housing market down. It has also impacted the auto market, as the cost of car loans have gone up substantially. The higher interest rates have also impacted companies, who are postponing capital investments. For December the inflation rate was 6.5%, down from November’s 7.1%. The FED would like to see inflation down more and unemployment go up from its historic low of 3.5%. The war in Ukraine resulted in a net energy shortage. That shortage resulted in higher energy prices. This too, was inflationary.  The cost of energy is coming back down now.

A View of Where We Are

As the FED raised rates the interest paid on short-term interest-bearing notes climbed. It became a place to earn a fair return with very little risk. During 2022 value stocks did much better than growth stocks. For example, based on a J.P. Morgan asset management report at the end of the year, large value stocks were down 7.5% while growth stocks were down 29.1%. It appears that the FED will continue to raise rates at their next meeting at the end of this month. When rates go up, the value of bonds go down. With this in mind it is my belief that there will be an opportunity to buy bonds at good rates later. We have maintained our position in value stocks and believe that as the stock market begins to rise, they will continue to do well.

Numbers Review

The S&P 500 Index ended the quarter at 3840 compared with 3586 at the end of the last quarter, up 5.4%, and down 19.4% for the year. The S&P Mid Cap Index ended the quarter at 2430, up from 2204 at the end of the last quarter, or 8%, and negative 14.5% for the year. The S&P Small Cap Index ended at 1158 compared with 1065 at the end of the last quarter, up 6.6%, and down 17.4% for the year. The MSCI ACWI ex USA Index for foreign stocks increased to 281 from 247 for a loss of 18.3% for the year. The 10-year Treasury was 3.83% almost unchanged from the end of the last quarter. The Bloomberg Barclays US Aggregate Bond Index yield went from 1.75% at year-end 2021 to 4.68% for a decline in the value of bonds of 12.88% year to date.

Where Might We be Headed?

The FED has made it clear that they are going to do whatever is necessary to crush inflation. They also know that if the economy falters too badly it will be their fault. It seems likely that they will raise rates again, but we are now seeing a softening of the economy, a less severe shortage of workers, and large companies announcing major layoffs to protect their earnings. Stocks appear positioned near the low end of the last downturn. In addition, bond values look rather good with it unlikely that we’ll see a drop in value like we saw in 2022. If there is a downturn in the economy, bond values might increase as investors look for a safe haven from stocks and it may result in the FED changing its position on rate increases.


At this time, it appears that having money in value stocks, some in growth and the use of cash that is getting a decent return is the way to go. As the year matures, a shift to bonds from the cash position is likely. In addition, broader equity diversification by asset classes should once again become appropriate.

Ed Mallon