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US Markets

2022 Review and Outlook

Executive Summary

  • Worst year for U.S. equities since 2008, with nine of 11 sectors finishing in the red
  • The Fed hiked rates 425bps vs. expectations for 75bps at the start of 2022
  • The stock of negative-yielding global debt is down 99.9% from its December 2020 peak
  • Value outperformed Growth by the 2nd widest margin on record (1979)
  • Inflation and employment measures (lagging) remain stubbornly high
  • Housing and PMIs (leading) are in sharp decline
Major Benchmarks

2022 was a tumultuous year for global capital markets, which had to contend with a range of geopolitical and economic headwinds after the Covid-era fallout. Inflation measures reached 40-year highs resulting from ultra-stimulative fiscal and monetary policies, supply chain disruptions, shifting consumer spend towards goods from services, robust employment and wage gains, the Russia-Ukraine war, and China’s zero-covid policies.  

Global central banks responded to stubbornly high price pressures with one of the strongest hiking cycles in decades. Over 80 central banks tightened in 2022, including 15 of the 20 most important central banks for markets globally. The Federal Reserve hiked the overnight FFR by 425bps across the final seven meetings in 2022 or the equivalent of 17 25bp rate hikes. At the start of 2022, markets were pricing in just three 25bp rate hikes.

U.S. equity benchmarks (INDU, SPX, NDX, RTY, MID) had their worst annual performance since 2008, which included declines over the first three quarters of 2022. The blue-chip Dow was the relative outperformer due in part to its unique price weighting methodology and greater percentage of value-style members. 

The Nasdaq Composite and Nasdaq 100 were the laggards due in large part to the strong weighting of their mega-cap, growth-style members, which were disproportionately impacted by the historic rise in rates.  

S&P 500 Sectors

Only two of eleven sectors finished in the green after all eleven posted robust double-digit gains in 2021. Energy (+65.4%) again led all sectors following 2021’s leading return of 54.4%. 

The defensive Utilities, Staples, and Healthcare sectors finished around the breakeven level. The growth-heavy Communications, Consumer Discretionary, and Technology sectors were the largest underperformers.  

Growth & Value Indices

One of the most glaring rotations in 2022 was the abrupt end of growth-style leadership which, at the start of the year, we suspected was a strong possibility. The MID’s 2021 Review & Outlook highlighted the historic pace of growth outperformance versus value over the prior 14 years concluding it was “nothing short of remarkable” but noted several technical measures indicated the pace of outperformance had reached extreme levels suggesting it was ripe for a reversal. Aided by the fastest rate hike cycle since 1981, value outperformed growth by more than 20 percentage points in 2022, which marks its 2nd best outperformance on record going back to the inception of the Russell indices in 1979.    

The below ratio of the Russell 1000 Growth Index over the Russell 1000 Value Index illustrates the 14-year trend of growth outperformance (2006 – 2020) which ended with a parabolic rise to a major top in November 2020. The most extreme rate of outperformance over this time occurred over the first eight months of 2020, where Growth outperformed value by an average of 4.7 percentage points each month. To understand the extreme nature of that eight-month outperformance, not since March 2001 had value outperformed a single month by at least 4.7 percentage points. Based on traditional technical analysis methodology, the ratio’s large “double top” pattern projects a minimum measured move to levels not seen since December 2019, suggesting value outperformance will continue.  

Relative Strength: Growth / Value

Rates, Commodities, and the Dollar

The Federal Reserve’s hawkish pivot from a “transitory” inflation outlook had the most profound impact on rates and spreads. The shorter 2YR UST yield, most sensitive to the Fed’s monetary policy, rose as much as 407bps to a high of 4.8% in early November before ending the year at 4.43%. The long 10YR UST yield rose as much as 283bps to a high of 4.34% in October before closing the year at 3.88% (+237bps). The dramatic rise in the long yield made a convincing upside breakout from a 40-year downtrend indicating a secular reversal towards rising rates could be underway.  

UST 10-year Yield - secular reversal

Spreads have been flattening since their post-covid “wides” in March of 2021. The 10YR – 2YR UST spread first inverted in April before reaching a low of negative 84bps in early December, its deepest inversion since 1981.  

UST 10YR-2YR Spread

The Bloomberg U.S. and Global Aggregate Bond Indices representing baskets of investment grade Treasury, government-related, and corporate debt had record declines of 13% and 16.2%, respectively. The prior record declines were -2.9% and -5.9%, respectively.  

U.S. & Global Aggregate Bond Indices

Higher rates, or lower bond prices, led to a dramatic decline in the total stock of negative-yielding debt. Since peaking in December 2020 at $18.4T, total negative-yielding global debt has fallen more than 99.9% to less than $25B (Japan has a bond issue maturing in 2024 that’s still barely negative).  

Total Negative Yielding Global Debt

Commodities, particularly food and energy, were unusually volatile due in large part to Russia’s invasion of Ukraine back in late February. After being up as much as 41.8% at its peak in March, the Bloomberg Commodity Index (BCOM) finished the year with a gain of 13.8%. This followed a 27% rise in 2021, which then marked a 42-year high. WTI crude also peaked in March at the $130.50 price level (+73.5%) before finishing at $80.26 (+6.7%).  

Precious metals surged late in the year, leaving spot gold with a modest decline of 0.3% and spot silver with a modest gain of 2.8%. While those returns performed relatively well versus both stocks and bonds, precious metals were serious laggards over the prior decade. The S&P 500 outperformed gold in eight of the prior ten years ending 2021 with a total return of 362% versus +16.9% for gold. Over this same period, the iShares 20yr+ duration ETF (TLT) had a total return of 55.4%. 

Gold’s glaring underperformance over the last decade has seemingly reduced its place in investor portfolios in favor of vastly outperforming growth stocks, emerging cryptocurrencies, or continuously rising treasury bonds. However, the trend of gold underperformance may be ready to change. Growth stocks were amongst the hardest hit equities in 2022, and their underperformance would be expected to continue if the Fed follows through on its forecast to keep rates elevated throughout all of 2023. Typical safe-haven treasuries just cemented their steepest decline in modern times. And damaged confidence in cryptocurrencies may take time to heal after the fallout from the FTX scandal, along with numerous leading cryptocurrencies crashing more than 50% - 70% from their 2021 highs.  

From a technical perspective, the below chart of gold (upper panel; monthly period) shows it peaked in 2011 and has since been in a long, sideways range. While making marginal new highs in 2020 and 2022, it has so far been unable to hold the breakout, and it finished 2022 down 5.1% from its 2011 top. This long-term setup resembles a large, 13-year “cup and handle” continuation pattern following a prior steep uptrend whereby gold gained 555% from September 2001 through September 2011 versus a total return of just 32% for the S&P 500. While its ratio to stocks is not yet making new highs, the ratio of gold to treasury bonds (lower panel) has been rising sharply over the prior year and, just in November, “broke out” to new all-time new highs that had previously been in place since the summer of 2011.   

Spot Gold (monthly period) | Relative Strength: Gold/Tsy. Bond ratio

The US Dollar Index (DXY) was up as much as 20% at its peak in September, which if it held into year-end, would have marked its biggest annual gain on record. However, emerging economic data suggested “peak inflation” was already in the rearview mirror, with YoY core CPI and PCE each peaking a quarter earlier in June. At the same time, the central banks of Europe and Japan became increasingly hawkish, with the latter BOJ doubling the tolerance band on its 10-year yield target from 25bps to 50 bps while simultaneously announcing a roughly 20% increase in the size of its JGB purchase. Accordingly, the DXY gave up more than half its peak gains before finishing with a gain of 8.2%.  

Corporate Earnings

According to FactSet, Q4 earnings for the S&P 500 are expected to decline 2.8%, while calendar year earnings are expected to grow 5.1%. The CY 5.1% earnings growth is down from estimates of 9.1% on June 30th and 6.9% on September 30th. The forward 12-month P/E ratio for the S&P 500 is 17.3, which is below the five- and 10-year average of 18.5 and 17.1, respectively. A key question for markets in 2023 is whether we get an earnings recession or not.

Looking Ahead

2022 was a difficult year for most strategists and analysts forecasting economic activity, corporate earnings, and asset prices, given the unprecedented pace of tightening by central banks, which was far more hawkish than most expected and in sharp contrast to the “race to the bottom” strategy from the post-GFC era. However, 2023 could prove to be just as difficult.  

While the Fed and markets are currently not that far apart forecasting/pricing this cycle’s peak terminal rate (less than 25bps), futures are pricing rate cuts by late summer, while the FOMC dot plots suggest the terminal rate will remain elevated through the end of 2023. 

The FOMC is also projecting 0.5% GDP growth for 2023, which is as close to recession as you will see them forecast. While most economists are forecasting a recession at some time in 2023, there is increasing uncertainty as to how severe the coming slowdown will be. Adding to the uncertainty is the lagging impact of rate hikes along with conflicting economic data.  

Economic data has been mixed as lagging indicators such as inflation, employment, job openings, and wage data have been holding near recent highs giving Chair Jerome Powell cover to keep rates elevated “higher for longer” but, in turn, reducing the odds for a “soft landing.” 

Leading indicators are painting a different story. The sharp rise in mortgage rates has led to a record 10th-straight monthly decline in existing home sales which are fast approaching their GFC lows. Pending homes sales are already at their 2nd lowest level going back to 2001. The homebuilder sentiment index (NAHB) declined every month in 2022, its longest slide on record and its 2nd lowest reading in 12 years. PMIs have been in a sharp decline as well, with both manufacturing (49) and New Orders (47.2) for November in contractionary territory (sub-50). 

Services are down meaningfully from 2021 highs but are still above the 50+ expansionary threshold. The latest reading for November (56.5) came in higher than forecasts (53.5), which is not helping the Fed’s cause.  

For U.S. equities represented by the flagship S&P 500, near-term rallies can happen at any time given the deeply negative sentiment readings in place, such as equity put/call ratios and fund manager surveys. However, the trend of lower highs and lower lows is firmly in place. The first two significant relief rallies saw gains of 13% and 19%, forming clearly defined resistance before then rolling over to new lows. The third rally of 18% stalled at the same resistance, which for all three coincided with brief recoveries above the 40-week (~200-day) moving average (purple line).  

The October 2022 low marked a near exact 50% Fibonacci retracement (3,505) of the prior post-covid uptrend spanning March 2020 to January 2022. If new lows are in store, the next Fibonacci retracements (read: potential support) are down at 3,195 (61.8%) and 2,812 (76.4%). Note: The March 2020 Covid low, representing a 35.4% decline, came within 8 points (0.0037%) of the 76.4% Fibonacci retracement of the prior uptrend spanning February 2016 to February 2020.  

S&P 500 (weekly period)

After a 12-year trend of underperforming the S&P 500, emerging markets may be in the early innings of a cyclical bullish reversal toward a multi-year trend of relative outperformance. In general, emerging markets are sensitive to the greenback, and we have already seen the U.S. dollar Index give back more than half of 2022’s record gains since late September. The Federal Reserve is slowing the pace of rate hikes. Peak inflation appears to be in the rearview mirror while leading economic measures (housing, PMIs) are in sharp decline. Meanwhile, the central banks of Europe and Japan are becoming increasingly hawkish.  

The ratio of the MSCI Emerging Market Index (MXEF) to the S&P 500 (monthly period) made fresh all-time lows in October 2022 following 12 years of underperformance. The ratio quickly reversed higher in November, aided in part by the reopening news in China. Chinese companies have a 30% weighting in the MXEF. In November, the Hang Seng index had its best month (+27%) since October 1998 (24yrs) and 3rd best since the mid-1970s, while the emerging market index had its best month (Nov +15%) since May 2009.

China, which enters 2023 contending with a surge in Covid infections, is clearly a big wildcard, and the future direction of the U.S. dollar is difficult to forecast, giving numerous crosscurrents impacting FX. However, if the upside rate of change in the U.S. dollar has peaked, due possibly to “peak inflation” and “peak tightening” already in the rearview mirror, along with a looming U.S. recession on the horizon, emerging markets may already be looking more attractive, or at least deserving of a greater weighting.  

Relative Strength: Emerging Markets/S&P 500

The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The Market Intelligence Desk Team


Nasdaq’s Market Intelligence Desk (MID) is designed to provide critical touch-points for timely trading analysis and market information.

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