Quarterly Market Insights | Q4 2022

U.S. Markets

Stocks ended a volatile fourth quarter with a slight gain, which helped repair some of the damage since the beginning of the year.

For much of the quarter, sentiment was boosted by stronger-than-expected earnings, a deceleration in inflation, and a growing belief that the Fed may start to scale back on the pace of interest rate hikes. But the upbeat mood soured in December as recession fears were rekindled by ongoing Fed hawkishness.

The Dow Jones Industrial Average gained 15 percent for the three months, while the Standard & Poor’s 500 tacked on 7 percent. The tech-heavy Nasdaq lagged, slipping 1 percent.1

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An October Rally

The quarter opened on a volatile note as stocks reacted to both international news and domestic economic updates. An above-consensus inflation report sent stocks to levels not seen since 2020 before mounting an impressive turnaround that by day’s end had witnessed the Dow Industrials climbing 1,500 points from their midday low.2

The market stabilized as third quarter earnings started rolling in. Early earnings reports calmed some fears of deteriorating profits and pushed Fed policy concerns into the background.

November Follow Through

Stocks added to their gains in November based on growing investor optimism for a slowdown in future rate hikes. After the Federal Open Market Committee (FOMC) announced a 75 basis point rate hike at the start of the month, stocks retreated on hawkish comments by Fed Chair Jerome Powell in his post-meeting press conference. Markets staged a quick recovery, though, following a cooler-than-expected inflation number that ignited a powerful rally that lifted stocks to their biggest one-day gain in two years.3

December Blues

Stocks opened in December by surrendering some of the October and November gains as recession fears and concerns over higher rates once again dragged on investor sentiment. The Fed announced another rate hike of 50 basis points, but it was the increase in the terminal rate (i.e., the rate at which the Fed stops further rate hikes) that elevated recession worries and closed the quarter and the year on a muted note.

Quarterly Sector Scorecard

Ten sectors notched solid gains for the quarter, but Consumer Discretionary was under pressure (−9.33 percent). Energy (+21.45 percent), Industrials (+18.55 percent), Materials (+14.22 percent), Financials (+12.65 percent), Health Care (+12.17 percent), and Consumer Staples (+11.72 percent) posted double-digit gains. Utilities (+7.62 percent), Technology (+4.96 percent), Real Estate (+2.55 percent) and Communications Services (+0.21 percent) also posted gains.4

What Investors May Be Talking About in January

In the month ahead, expect the market spotlight to fall on three key dates.

The first will come on January 12th with the December Consumer Price Index report. A continued slowdown in inflation may help lift some pressure on the Fed to raise interest rates.5

The second will be on January 26th with the initial reading of the fourth-quarter gross domestic product. A healthy number may be a relief to those worried about an imminent recession, or it could be viewed as a reason for the Fed to maintain its hawkish rate hike path.5

Finally, the FOMC will open its two-day meeting on January 31st. The forward-looking markets tend to focus on what Fed Chair Powell says about the direction of the economy in the post-meeting press conference.5

World Markets

International markets were flat in December, with the MSCI-EAFE Index checking in with a loss of 0.01 percent.6

European markets trended lower on fears of a difficult winter, with losses posted in Germany (−3.29 percent), Italy (−3.67 percent), France (−3.93 percent), and the U.K. (−1.60 percent).7

Pacific Rim markets were mixed with Hong Kong jumping 6.37 percent on further China reopening steps. Meanwhile, Australia dropped 3.37 percent and Japan fell 6.70 percent.8

Indicators

Gross Domestic Product (GDP)

The final estimate of third quarter GDP growth was revised higher, from an annualized rate of 2.9 percent to 3.2 percent. The revision was due to an increase in an earlier estimate of personal consumption.9

Employment

The economy added 263,000 new jobs in November, a result that was above the consensus estimate of 200,000. The unemployment rate was unchanged at 3.7 percent. Wages rose 0.6 percent for the month, which was double the estimate. Additionally, wages rose 5.1 percent year-over-year, which was above the forecast of 4.6 percent.10

Retail Sales

Retail sales fell 0.6 percent as holiday shopping got off to a muted start. It was the biggest decline in nearly a year.11

Industrial Production

Output from the nation’s factories, mines, and utilities declined for the second straight month, falling 0.2 percent in November.12

Housing

Housing starts fell 0.5 percent, dragged lower by a decline of 4.1 percent in single family home starts. Permits for future home construction slumped 11.2 percent.13

Sales of existing homes dropped 7.7 percent from October and 35.4 percent from the previous year. November’s decline was the 10th straight month of declining sales. Higher mortgage rates combined with elevated home prices kept many would-be buyers on the sidelines.14

New home sales posted a surprise month-over-month increase of 5.8 percent, though year-over-year sales dropped 15.3 percent.15

Consumer Price Index (CPI)

Prices of consumer goods and services rose just 0.1 percent in November and increased 7.1 percent year-over-year. Both figures came in under consensus estimates of 0.3 percent and 7.3 percent, respectively. Core prices (excluding food and energy) also came in slightly lower than expectations. Declines in energy and used car prices more than offset the higher prices for food and shelter.16

Durable Goods Orders

Durable goods orders fell 2.1 percent, pulled lower by a sharp drop in aircraft orders (−36.0 percent).17

The Fed

In its mid-December FOMC meeting, the Fed approved a hike in its federal funds rate of 0.50 percent, while indicating its plan to raise rates further in 2023 to combat inflation.

In his press conference following the news, Fed Chair Powell suggested that the next hike may be a quarter percentage point increment. FOMC members lifted the terminal rate (i.e., the rate at which hikes would come to an end) to between 5 percent and 5.5 percent, up from their projection of 4.6 percent in September.18

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