Investing Into a Fog of Less Certainty: Year-End 2022 Market Commentary

Benjamin M. Lavine, CFA, CAIA, RICP
Chief Investment Officer, 3D

Data Source: Bloomberg

To read full market commentary, click here.

December 2022 Highlights:

  • The 4th quarter recovery in global equities stumbled somewhat in December, particularly U.S. equities, partially hurt by a more hawkish-than-expected Fed meeting (FOMC) in mid-December that pushed the benchmark overnight lending rate to 4.50%. An uneven economic lift-off from the end of Chinese COVID lockdown restrictions also contributed to market weakness, especially across Asia. In December, the MSCI All-Country World Index (ACWI) returned -3.9%.
  • Across major regions, International Developed and Emerging Markets (equities and currencies) outperformed the U.S. as investors bet that the worst has passed for Europe and broader Asia. In December, MSCI Japan (+0.3%) and MSCI Europe (0.0%) led major regions followed by MSCI Pacific ex-Japan (-0.5%) and MSCI Emerging Markets (-1.4%) while the S&P 500 ended down 5.8%.
  • Within the U.S., small caps underperformed large caps amidst the broader sell-off in U.S. equities, while value stocks outperformed growth stocks, the former benefiting from energy and industrial cyclicals. The S&P 600 Index returned -6.7% versus -5.8% for the S&P 500. S&P Pure Value returned -5.5% versus -7.3% for S&P Pure Growth.
  • Across sectors, defensive sectors (Utilities, Health Care, Staples) and traditional cyclical sectors (Energy, Industrials) outperformed while Growth Sectors (Communication Services, Technology, Consumer Discretionary) lagged.
  • Major Risk Factors outperformed the S&P 500 although High Quality lagged the other factors as High Dividend and Minimum Volatility benefited from the exposure to defensive segments of the equity markets.
  • Investment grade fixed income had benefited from a continued drop in long-term interest rates; however, a sharp rebound in interest rates following the December FOMC meeting weighed on overall U.S. fixed income. Investment grade sectors (mortgages, credit) continued to benefit from narrower credit spreads. The 10-Year U.S. Treasury yield ended the month at 3.88% off intra-quarter lows of 3.45% prior to the December FOMC meeting.
  • The Bloomberg U.S. Aggregate Bond Index dropped 0.5% for the month while the Global ex-U.S Aggregate returned +1.3%, helped by a weaker U.S. dollar. The Bloomberg US High Yield Index returned -0.6% hurt by higher interest rates, while Bloomberg/Barclays Emerging Market Debt LC returned 2.1% as local currencies appreciated against the US Dollar.
  • Within Equity Alternatives, S&P GSCI Commodities Index returned -1.4% as commodities recovered late in the quarter over prospects of China reopening but ended marginally down despite oil prices rallying late in the month. Precious metals continued to benefit from increased uncertainty over monetary policy and the economic outlook. S&P GSCI Precious Metals returned 4.8% for the month. S. REITs suffered from U.S. equity market weakness and higher interest rates with the Dow Jones REIT Index down 5% for the month.
  • If the economic outlook continues to ‘flatten’ following the surge in post-pandemic demand, then investor and policymaker focus will likely shift towards the strength and resiliency of labor market conditions and whether rising wages represent an imbalanced labor market.
  • 3D believes that investors should remain fully invested for the most part as part of a strategic asset allocation built on risk-based investment programs. Unlike the beginning of 2022 where we were more cautious due to rich valuations on both equities and fixed income, the current environment speaks to more attractive valuations across risk-based assets, reflecting the higher uncertainty of the macro environment heading into 2023.

To read full market commentary, click here.

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