2022 | Year End Review

For investors, 2022 was a year we would like to soon forget.  Despite a fourth quarter rally, both stocks and bonds posted their worst returns since the financial crisis of 2008-2009. Interest rate increases, ongoing inflation, recession fears, ongoing concerns about the war in Ukraine and the effects of Covid on the Chinese economy all weighed on markets. 

While the S&P 500 gained 7.6% in the fourth quarter, it finished the year with a negative 18.1% total return.  Traditional portfolios constructed of a mix of stocks and bonds posted some of their worst returns since the 1930s. These lower returns were due to large decreases in bond prices across all sectors in response to interest rate increases instituted by the Federal Reserve.  Volatility remained elevated with large market swings in both directions in reaction to conflicting economic data.

Prior to 2022, market returns had been driven primarily by growth-oriented stocks and technology stocks in particular.  Firms like Microsoft, Apple, Google, and Facebook accounted for much of the return in the overall market.  This trend reversed in 2022 as the technology heavy Nasdaq index lost over 32%.  Value-oriented stocks, which are less sensitive to higher interest rates, fared better, posting a negative return of roughly 8%.  Small cap stocks slightly underperformed (-20%) large company shares.  International markets also declined with developed markets off roughly 14%, and emerging markets down 20%.

Apart from Energy, which benefited from constrained supply and higher prices, all sectors of the market posted negative returns for the year.  Hardest hit were the Technology (-28%) and Communication Services (-39%) sectors.  Many stocks in these sectors had been driven higher during the Covid pandemic as demand for online services and shopping surged but fell last year as consumers returned to more traditional forms of shopping, services, and entertainment.  The Consumer sector also declined (-37%) on fears that a recession would crimp spending.  Real Estate (-26%) declined as higher interest rates slowed the housing market.  Sectors that performed relatively well included Consumer Staples, Healthcare, and Industrials. 

Fixed income markets suffered their worst declines in nearly forty years as the Fed rapidly hiked rates in reaction to surging inflation.  The Core Aggregate Bond Index declined over 13% for the year (not that much better than the stock market). Performance improved in the fourth quarter with most sectors up slightly, but rates remain much higher, particularly on the short end, than they were just a year ago.  Our emphasis on shorter term fixed income holdings over the past several years helped our performance relative to the market but holdings in preferred stock instruments suffered higher losses. Higher interest rates affect just about every sector of the economy and the Fed is determined to use higher rates to stave off inflation before it becomes imbedded in the economy.  Recently the yield curve has inverted (short-term rates higher than long-term rates) which has typically been indicative of an economic slowdown.  Bond investors seem to believe that the economy may slow enough or enter a recession that will cause the Fed to ease rates later in 2023. 

Consensus expectations seem to be forming that the U.S. will enter a slowdown or shallow recession in the first half of 2023 and then recover later in the year as the Fed relaxes its interest rate policy.  We agree this is most likely scenario at this point given that unemployment remains low, and consumer and business finances are relatively strong.  Corporate profit margins and earnings are likely to come under pressure this year but that appears to be priced into the market at this point.  If the global economy declines more than expected, this could drag equity prices down further, but bond prices would likely rally.  We will be carefully evaluating the data on economic growth and corporate profitability over the coming months. We remain biased towards shorter maturities in the fixed income allocations of our portfolios. Additionally, political divisions that affect fiscal policy as well as issues such as the Federal debt limit may affect the markets.

As we discussed in our previous quarterly letter, bear markets happen frequently, and mostly unexpectedly, after a period of strong market returns.  Leading up to 2022, the S&P 500 had returned an average of over 16% per year during the previous decade which is high by long-term historical averages.  Low interest rates, steady economic growth, technological innovation, and stimulative fiscal policies all contributed to the market of risk-based securities producing strong returns over that time frame. In response to the Covid pandemic, the Fed, central banks, and governments around the world enacted policies that, coupled with the disruptions caused by Covid, went on for too long. This resulted in the highest inflation levels we have experienced in forty years and a bubble in certain asset prices that was deflated in 2022.  Market uncertainty remains as investors sort out the recent (slight) improvements in inflation indicators coupled with what a slowdown, or outright recession, will do to corporate earnings.

Our job through this period is to maintain our discipline of choosing suitable investments that meet the long-term financial goals for our clients’ portfolios.  Successful investing is a marathon, not a sprint and trying to time or trade through periods of market volatility never produces consistent results.  As always, we are grateful that you have entrusted us with your financial health and value the relationship that we have with all our clients.

As always, please do not hesitate to contact us with any questions.

Jonathan F. Kolle, CFA®
President

Joseph K. Champness
Director

Shawn R. Keane, CFP®
Vice-President

Cindy de Sainte Maresville, CFP®
Certified Financial Planner

Rusty Giles
Director of Marketing

James V. Kelly, CFA®
Director

The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.