Wall Street ended a quiet day of trading with more losses on Friday, closing in on the worst year record for the S&P 500 since 2008.
The benchmark ended with a loss of 19.4% for 2022, or 18.1%, including dividends. It’s just the third annual decline since the financial crisis 14 years ago and a painful reversal for investors after the S&P 500 posted a gain of about 27% in 2021. All told, the index lost $8.2 trillion in value, according to the S&P Dow Jones Indexes.
The Nasdaq Composite, with a heavy component of technology stocks, posted an even larger loss of 33.1%.
Meanwhile, the Dow Jones Industrial Average posted a loss of 8.8% for 2022.
Stocks struggled all year As inflation put increasing pressure on consumers and raised concerns about economies slipping into recession. Central banks raised interest rates to fight rising prices. Drastic interest rate hikes by the Federal Reserve remain a major focus for investors as the central bank walks a fine line between raising interest rates enough to quell inflation, but not so much that they stall the US economy in recession.
The Fed’s key lending rate stood in a range of 0% to 0.25% at the start of 2022 and will close the year in a range of 4.25% to 4.5% after seven increases. The US central bank expects it to reach a range of 5% to 5.25% by the end of 2023. Its forecast does not require a rate cut before 2024.
Rising interest rates prompted investors to sell expensive stocks of tech giants like Apple and Microsoft as well as other companies that have boomed as the economy recovers from the pandemic. Amazon and Netflix lost nearly 50% of their market capitalization. Both Tesla and Meta Platforms, Facebook’s parent company, are down more than 60%, their largest annual drop ever.
Russia’s invasion of Ukraine exacerbated inflationary pressures earlier in the year by making oil, gas and food commodity prices more volatile amid existing supply chain issues. Oil closed Friday near $80, about $5 higher than where it started the year. But in-between, oil jumped above $120, helping energy stocks make the only gains among the 11 sectors in the S&P 500, up 59%.
China spent most of the year imposing strict COVID-19 policies, curtailing production of raw materials and goods, but is now in the process of removing travel and other restrictions. It is uncertain at this point what impact China’s reopening will have on the global economy.
However, the Fed’s fight against inflation is likely to remain the overarching concern on Wall Street in 2023, according to analysts. Investors will continue to search for a better idea of whether inflation is falling fast enough to take pressure off consumers and the Federal Reserve.
Jay Hatfield, CEO of Infrastructure Capital Advisors, said if inflation continues to show signs of abating and the Fed has a grip on its campaign to raise interest rates, that could set the stage for a stock recovery in 2023.
“The Fed has been the biggest drag in this market, really since November of last year, so if the Fed pauses and we don’t have a major recession, we think that sets us up to go higher,” he said.
There was little corporate or economic news for Wall Street to review on Friday. This, combined with the holiday-shortened week, set the stage for mostly light trading.
The S&P 500 fell 9.78 points, or 0.3%, to close at 3,839.50. The index posted a loss of 5.9% in the month of December.
The Dow Jones fell 73.55 points, or 0.2%, to close at 33,147.25 points. The Nasdaq index fell 11.61 points, or 0.1%, to 10,466.48 points.
Tesla rose 1.1%, continuing to flatten out after heavy losses earlier in the week. The electric car maker’s stock is down 65% in 2022, wiping about $700 billion off market value.
Southwest Airlines rose 0.9% as its operations returned to relative normal after massive cancellations over the holiday period. The stock still closed down 6.7% for the week.
Small cap stocks also fell on Friday. The Russell 2000 Index fell 5 points, or 0.3%, to close at 1,761.25.
Bond yields have mostly gone up. The yield on 10-year Treasury notes, which affects mortgage rates, rose to 3.88% from 3.82% late Thursday. While bonds are usually fair when stocks are down, 2022 turned out to be one of the worst years for the bond market in history, thanks to rapid interest rate and inflation increases on the part of the Federal Reserve.
There are several big job market updates in the first week of 2023. It was a particularly strong area of the economy and helped create a bulwark against a recession. But that made the Fed’s job more difficult, because strong employment and wages mean it may have to remain aggressive to continue fighting inflation. This, in turn, increases the risk of the economy slowing down too much and causing a recession.
The Fed will release the minutes of its latest policy meeting on Wednesday, which could give investors more insight into its next moves.
The government will also release its November report on available job opportunities on Wednesday. This will be followed by a weekly update on unemployment on Thursday. The monthly employment report is due closely on Friday.
Wall Street is also awaiting the latest round of corporate earnings reports, which will start pouring in around the middle of January. Companies have warned investors that inflation is likely to cap their earnings and returns in 2023. That is after spending most of 2022 raising prices on everything from food to clothing in an effort to offset inflation, although many companies have gone further. That has already nullified its profit margins.
Companies in the S&P 500 are widely expected to report a 3.5% drop in earnings during the fourth quarter, according to FactSet. Analysts expect earnings thereafter to remain roughly flat through the first half of 2023.
US stock markets will be closed on Monday in observance of the New Year’s Day holiday.
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