2022 Illustrated Market Review

Key Takeaways Stocks had their worst year since 2008. Bond prices fell as inflation reached a four-decade high.  A balanced "60/40" portfolio ended down 14%. History suggests there are brighter days ahead.

It was an up-and-down year for markets—in the end, one with more down than up.

The world gave financial markets a lot to process.

• The coronavirus pandemic eased but remained a global concern, as did the supply-chain issues that accompanied its arrival. 
• Inflation reached a 40-year high in the US,¹ and the Federal Reserve pursued a series of interest rate increases to combat rising prices, actions similar to those taken by other nations’ central banks. 
• Russia’s invasion of Ukraine in February brought uncertainty about political stability and energy prices, among other worries. 
• A midterm US election shifted more power to Republicans but left Democrats in a stronger position than some had expected.

Against this backdrop, stock and bond markets fell for the year, despite several rallies. 

Market Summary

2022 INDEX RETURNS

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2023, all rights reserved. Bloomberg data provided by Bloomberg.

US Stocks

2022 INDEX RETURNS

The US stock market, as measured by the S&P 500 Index,² fell to a two-year low in September; at one point, the index had given back 50% of its post-pandemic rally.

After the sharp drop in the first half of the year, led by technology stocks, the stock market rebounded somewhat. That came as the political situation became clearer and with investors pricing in prospects of smaller Fed rate hikes going forward as inflation cooled. Despite the rally, the US market, as measured by the Russell 3000 Index, fell 19.21% for the year, its worst annual return since the financial crisis in 2008. 

Late Rebound Not Enough for Markets 

Past performance is no guarantee of future results. In USD. MSCI All Country World Index, net dividends. MSCI data © MSCI 2023, all rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Headlines are sourced from various publicly available news outlets and are provided for context, not to explain the market's behavior.

Inflation was front and center all year long. The US experienced the highest price increases in four decades, and the Fed lifted rates in a bid to reduce inflation from above 9% to the long-term target of 2%. Price increases showed signs of peaking late in the year, with inflation easing to 7.1% in the US in November, although a slow retreat from multidecade highs could keep it a concern for central banks well into 2023. Supply-chain issues related to the pandemic and to Russia’s war in Ukraine also eased, and food and fuel costs declined.

The midterm elections in the US left a split Congress, with Democrats narrowly controlling the Senate and Republicans taking back the House, which could affect the legislative agenda and items like tax increases and spending packages. But investors may be wise to avoid focusing much on the outcome of elections, as markets have tended to reward those who stayed invested regardless of the outcome. And elections are just one of many factors influencing returns.

Ranked Returns for 2022 (%) - US

World Market Capitalization - US

Period Returns (%) - US

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Value (Russell 1000 Value Index), Large Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Value (Russell 2000 Value Index), and Small Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2023, all rights reserved.

Global Stocks

2022 INDEX RETURNS

Global stock markets also ended with their largest declines since the financial crisis. Global stocks, as measured by the MSCI All Country World Index,³ fell 18.4%.

The global stock market can be separated into two parts: (1) international developed stocks and (2) emerging market stocks. 

(1) International Developed Stocks

Developed international stocks, as represented by the MSCI World excluding USA Index, lost 14.29%. 

Ranked Returns for 2022 (%) - International Developed

World Market Capitalization - International Developed

Period Returns (%) - International Developed

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index is used as the proxy for the International Developed market. MSCI data © MSCI 2023, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. 

(2) Emerging Markets Stocks

Emerging markets, as represented by the MSCI Emerging Markets Index, declined 20.09%.

Ranked Returns for 2022 (%) - Emerging Markets

World Market Capitalization - Emerging Markets

Period Returns (%) - Emerging Markets

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. MSCI data © MSCI 2023, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. 

Silver Linings for Value Stocks

While markets were down as a whole, value stocks were a bright spot for investors. Value shares have prices that are low relative to a measure like a company’s book value, and these stocks outperformed pricier growth stocks by the largest margin since 2000, at the end of the initial dot-com craze: The MSCI All Country World Value Index fell 7.5% vs. a 28.6% decline for the MSCI All Country World Growth Index. That recent turnaround has rewarded investors who remained disciplined following a three-year slump for value, which ended in June 2020. Since then, value has beaten growth by 10.1 percentage points, annualized. 

Small capitalization stocks held their own with large cap stocks. The MSCI All Country World Small Cap Index declined 18.7% vs. the 18.4% fall for the MSCI All Country World Index. Historically, small cap stocks have outperformed large cap stocks.⁴

A Reset for Crypto and FAANG Stocks

If the market decline of 2022 taught investors anything, it’s that what goes up might also come down. Some of the most hyped investments of the past two years did just that.

Cryptocurrencies⁸ and FAANG stocks⁹ were all hit hard, with bitcoin falling below $17,000, about 75% lower than its high of nearly $68,000 in November 2021.¹⁰ As investors have learned by now, cryptocurrencies can be extremely volatile. From a distance, bitcoin might appear to have enjoyed a steady climb through much of its existence. There were, however, major slumps: On three occasions since 2017, bitcoin has fallen by more than 50%, including the decline that extended into 2022.

The FAANGs also saw notable declines in 2022 (see below). The group of tech stocks lost a combined $3.2 trillion in market value—one might say the market was de-FAANGed. Facebook parent Meta Platforms, Amazon, Apple, Netflix, and Google parent Alphabet all lagged the broad US market, with Facebook and Netflix suffering particularly sharp losses. The group collectively underperformed the Russell 3000 Index11 by more than 20 percentage points.¹² The slump came on the heels of a stellar decade—the FAANGs returned 28% per year from 2012 to 2021.

Tech Giants De-FAANGed

Past performance is no guarantee of future results. In USD. Cumulative returns, January 1, 2022–December 31, 2022. FAANG stock data source: Refinitiv. Facebook and Google now known as Meta and Alphabet, respectively. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

That reversal is a reminder that investors should be cautious about assuming past returns will continue. Even if a company with a track record of strong stock returns remains broadly successful, that may not translate to spectacular future returns. Excellence may now be what investors are counting on and not the basis for above-market returns. This point is borne out by looking back at stocks as they grew to become among the top 10 largest by market cap. On average, their performance lagged the performance of the broader market within a few years of entering the top ¹⁰.

Country Results 

2022 INDEX RETURNS

Turkey recorded the highest country results (after posting the lowest country results in 2021), while Sweden and Hungary posted the lowest returns for the year.

Past performance is no guarantee of future results. Country returns are the country component indices of the MSCI All Country World IMI Index for all countries except the United States, where the Russell 3000 Index is used instead. Global is the return of the MSCI All Country World IMI Index. MSCI index returns are net dividend. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. MSCI data © MSCI 2023, all rights reserved.

Real Estate Investment Trusts (REITs)

2022 INDEX RETURNS

Global real estate, as represented by the S&P Global REIT Index, fell 24.36%.

Ranked Returns for 2022 (%) - Real Estate

Total Value of REIT Stocks

Period Returns (%) - Real Estate

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Commodities

2022 INDEX RETURNS

The Bloomberg Commodity Total Return Index returned +16.09% for the year.

Heating Oil and Low Sulphur Gas Oil were the best performers, returning +90.95% and +77.90% during the year, respectively. Coffee and Aluminum were the worst performers, returning -23.44% and -16.81% during the year, respectively. 

Ranked Returns for Individual Commodities (%)

Period Returns (%) - Commodities

Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Commodities returns represent the return of the Bloomberg Commodity Total Return Index. Individual commodities are sub-index values of the Bloomberg Commodity Total Return Index. Data provided by Bloomberg.

Bonds (Fixed Income)

2022 YiELD CURVES

Some investors may view bonds as a safe haven, expecting bonds to rise in value when stocks fall. However, this was not the case in 2022. The tandem decline for stocks and bonds was relatively rare.

Benchmark US Treasuries posted their worst annual returns in decades, with 10-year Treasury notes losing 16.3%,⁵ a second straight annual loss. The last time investors saw back-to-back losses was in the late 1950s. 

The yield curve, which charts the difference in yield between long-dated and short-dated bonds, was inverted at year’s end. The 10-year yield ended just below 3.9%, while the 2-year yield was just above 4.4%,⁶ reflecting the higher short-term rates.

US Treasury Yield Curve (%)

Interest rates increased across all maturities in the US Treasury market for the year.

On the short end of the yield curve, the 1-Month US Treasury Bill yield increased 406 basis points (bps) to 4.12%, while the 1-Year US Treasury Bill yield increased 434 bps to 4.73%. The yield on the 2-Year US Treasury Note increased 368 bps to 4.41%. The yield on the 5-Year US Treasury Note increased 273 bps to 3.99%. The yield on the 10-Year US Treasury Note increased 236 bps to 3.88%. The yield on the 30-Year US Treasury Bond increased 207 bps to 3.97%.

Bond Yields Across Issuers (%)

In terms of total returns, short-term US treasury bonds returned -5.47% while intermediate-term US treasury bonds returned -7.77%. Short-term corporate bonds returned -5.62% and intermediate-term corporate bonds returned -9.40% (Bloomberg US Treasury and US Corporate Bond Indices).

The total return for short-term municipal bonds was -3.17% and -6.01% for intermediate-term municipal bonds. Within the municipal fixed income market, general obligation bonds outperformed revenue bonds, returning -7.74% vs. -9.29, respectively (Bloomberg Municipal Bond Index).

Period Returns (%) 

One basis point (bps) equals 0.01%.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds, and the Yield to Worst are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA Corporates, BBB-A rated. Bloomberg data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2023 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2023 ICE Data Indices, LLC. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Global Bonds (Fixed Income)

Interest rates generally increased within global developed markets for the year. 

Changes in Yields (bps) since 12/31/2021

One basis point (bps) equals 0.01%, so in the table below "430.2" equals 4.32%.

Source: ICE BofA government yield. ICE BofA index data © 2023 ICE Data Indices, LLC. 

Silver Linings for Battered Bonds

Higher interest rates can bring short-term pain as bond prices fall, but they can be beneficial in the long term and present new opportunities for investors.

Some investors may be hesitant to take advantage of higher yields, perhaps because of concerns about the potential for even higher yields to come. They may even consider reducing their bond exposure. But if yields keep rising, investors seeking higher expected returns may still be better off maintaining the duration of their fixed income allocation.

Rising yields affect bond portfolios in several ways. Longer-duration portfolios may experience larger immediate declines in value relative to shorter-duration portfolios as yields increase. But higher yields may lead to higher expected returns. Similarly, investors who have seen stock prices fall may be tempted to sell. But lower stock prices can be indicative of higher expected returns.⁷

With the yield curve inverted, some economists are saying a recession is inevitable, if one hasn’t already begun. But history shows that across the two years that follow a recession’s onset, stocks have a track record of positive performance, on average. This offers an important lesson on the forward-looking nature of markets, highlighting how current prices reflect market participants’ collective expectations for the future. Likewise, US stock returns following sharp declines have, on average, been positive over one-year, three-year, and five-year periods.

Taking a Balanced View of a Balanced Portfolio

With both fixed income and stock declining on the year, the traditional balanced portfolio of 60% stock/40% bond had a hard time offering much support in either asset category, leading some to question the utility of this approach.

Although 2022 was the worst year in history for many bond indices, the performance of the 60/40 portfolio¹³ didn’t crack the top five peak-to-trough drawdowns in close to a century’s worth of data. The drawdown that reached 19% at its nadir was painful, but it’s only two-thirds of the 30% peak-to-trough drawdown investors¹⁴ endured through a particularly difficult period from 2007–2009. And the portfolio saw some recovery late in the year, ending down 14% for 2022.

During rocky markets, it is especially important for investors to focus not solely on where returns have been but also on where they could be going. Looking at the performance of a 60/40 portfolio following a decline of 10% or more since 1926, returns on average have been strong in the subsequent one-, three-, and five-year periods (see below).

A Case for Optimism

Performance of a 60/40 portfolio (60% S&P 500 Index/40% 5-year US Treasury notes) following a decline of 10% or more: January 1926—December 2022

Past performance is not a guarantee of future results. In USD. Drawdowns include all periods where the 60/40 portfolio declined by 10% or more from the prior peak. Peaks are defined as months where the 60/40 portfolio's cumulative return exceeds all prior monthly observations. Returns are calculated for the one-, three-, and five-year look-ahead periods beginning the month after the 10% decline threshold is exceeded. The bar chart shows the average cumulative returns for the one-, three-, and five-year periods post-decline. There are 10, nine, and nine observations for the one-, three-, and five-year look-ahead periods, respectively. Source: Morningstar Direct as of December 31, 2022. Five-year US Treasury notes data provided by Morningstar. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

A look back at recent history makes a case for sticking with a plan. Handsome rebounds after steep declines can help put investors in position to capture the long-term benefits the markets offer.

Those who sold their stock holdings during the dot-com crash in the early 2000s wouldn’t have been in position to enjoy the recovery that eventually followed. Similarly, those abandoning a plan early in the 2008–09 financial crisis, or in March of 2020 as COVID fears spread, wouldn’t have benefited from the subsequent rallies.

What Will 2023 Bring?

There’s no way to know where markets may be headed, and it can be hard to imagine an upturn when prices have fallen or when there is consternation about the direction of the economy. But history argues for persistence and patience.

As we look at prices that in some cases are well off their highs, it’s helpful to keep history in mind entering 2023. That’s the definition of thinking of investing for the long term.

If we humans never took any shortcuts between discovering and reacting to breaking news, perhaps we could be more disciplined about it all. Instead, all evidence continues to confirm: Each year, each quarter, each day delivers fresh fodder in which seeds of doubt can sprout. Until the day we know exactly what the future has in store, we are honored to remain by your side, to help you make sense of the years ahead.

What goals can we help you tackle in 2023? What challenges would you like to tame? Let us know!

ASK US TO SHOW YOU WHERE YOU STAND.

FOOTNOTES

Content provided by Dimensional Fund Advisors, LP and adapted by Open Window Financial Solutions, Ltd.

1. Inflation data as defined by the Consumer Price Index (CPI) from the US Bureau of Labor Statistics.
2. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
3. MSCI data © MSCI 2023, all rights reserved.
4. The MSCI All Country World Small Cap Index has outperformed the MSCI All Country World Index by 2.7 percentage points, annualized, since 1999, the first year for which data is available.
5. 10-year Treasury notes represented by Bloomberg US Treasury 10-Year Bond Index. Data provided by Bloomberg.
6. Source: US Treasury.
7. Eugene F. Fama and Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47 (1992): 427–65.
8. This material is not to be construed as investment advice or a recommendation to buy or sell any security or currency.
9. The FAANG stocks are Facebook (Meta Platforms), Amazon, Apple, Netflix, and Google (Alphabet).
10. Source: Bloomberg and Refinitiv.
11. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Index has been included for comparative purposes only.
12. FAANG stock returns are computed as the average of Facebook (Meta), Apple, Amazon, Netflix, and Google (Alphabet share classes A and C) weighted by market capitalization at beginning of month. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. Named securities may be held in accounts managed by Dimensional.
13. The 60/40 portfolio consists of the S&P 500 Index (60%) and five-year US Treasury notes (40%). Five-year US Treasury notes data provided by Morningstar. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
14. Peak-to-trough drawdowns include all periods where the 60/40 portfolio declined by 10% or more from the prior peak. Peaks are defined as months where the 60/40 portfolio’s cumulative return exceeds all prior monthly observations. Troughs are defined as the months where the 60/40 portfolio’s cumulative return losses from the prior peak are the largest.