Market Recap: December 2022
After an unprecedented year of sustained losses across both stocks and bonds, 2022 was the reset button for many markets. A brief recap to note some notable events: Russia invades Ukraine, the FED (and other central banks) began their fight against inflation (which peaked at 9.1% annually in 2022) by raising interest rates, China’s sporadic lockdowns strained global supply chains and oil prices (WTI crude) topped out at $119 a barrel.
With the reversal of zero-bound interest rates in March of 2022 and the unraveling of globalization, these pivotal moments lead us to believe stocks and bonds may enter a period of higher volatility. The last decade (Post Global Financial Crisis) for markets has been unique with historically low interest rates, low inflation and low growth coupled with maximum accommodation and liquidity. The combination of these conditions has led investors to seek higher yields in risker investments and thus coined the term TINA, the acronym for “there is no alternative” (to owning more equity). Now that yields have risen, as a consequence of the FED’s actions, we will likely see more discussion of BATA, or “bonds are the alternative”. We believe that reversing of some of these conditions may produce higher structural volatility across multiple asset classes.
Since the peak in June of 2022, WTI Crude price per barrel has dropped by about 40%, staying in the $70-79 range since December. This is one of the leading indicators of core inflation. Inflation was a dominant story for 2022, and we believe this will continue to be a focus for markets and the Fed into 2023. In looking at headline year-over-year Inflation, you can see this fall from 9.1% in June to 6.5% in December driven by stabilizing energy prices and disinflation for goods. We have started to see inflation decelerate in the past few months in a meaningful way, which should allow the Fed to pause in the first half of the year.
Exiting zero-bound interest rate policies, moderating inflation and repricing global fixed income and equity have all helped sow the seeds for a brighter outlook in 2023 and beyond. While we anticipate volatile asset prices will persist in the years to come, leaning into newly created opportunities may prove to be the right decision over the long-term.
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