In 2022’s final week of trading, equity indices ended mostly lower on muted volume. The S&P 500 closed the year at -18.2%, its worst calendar performance since the 2008 crisis. Investment-grade bonds had their worst performance ever in modern history, returning -13%i.
In a shortened week with lighter data, investors focused more on longer-term thematic trends leading into 2023. The Fed’s interest rate hikes weighed on equities and bonds continuously from the beginning of 2022, and real estate, which usually transacts on a lag, is showing significant signs of slowing in the second half. Existing home sales fell for a sixth straight month and plunged more than expected in November to its second-lowest reading of the past two decades. The slowdown in real estate and construction is a headwind to broader economic activity.ii
Another important theme for 2023 is the impact of China’s abrupt transition from a “Zero-COVID” policy to nearly full reopening. The government has already dismantled key elements of the previous policy and indicated it would remove many of the remaining restrictions, including those related to international travel. This abrupt policy shift has led to an explosion of COVID cases in the short run; the absence of lockdowns will likely be economically stimulative in the medium- and long-terms. We will monitor the situation closely, as China’s rapid reopening would be a lever for both higher inflation and economic growthiii.
Lastly, the upcoming jobs report this Friday will likely be the most significant economic report in the first week of 2023iv. The Fed has a dual mandate of price stability and employment, and unexpected shifts in either could change the trajectory of interest rate policy. The jobs market has remained robust throughout 2022, which has allowed the Fed to go full steam ahead with monetary tightening. This will remain a significant theme in 2023.
We thank you for your partnership and trust and look forward to 2023. Happy New Year!
Asset Management Department
Sequoia Financial Group