Q4 2022: The Market in Review and 2023 Outlook

After more than a decade of strong returns across most asset classes, investments turned rocky in 2022. While in previous years markets encountered their share of challenges, 2022 brought a new litany of concerns, such as:

  • Heightened geopolitical stress
  • The War in Ukraine
  • China’s zero COVID-19 policies
  • Supply chain issues
  • Inflation and rising interest rates

Unlike the COVID-19 pandemic and the resulting shutdowns, this time, with an overheating economy, the Federal Reserve, also known as the Fed, was unable to ride to the rescue.

The S&P 500 fell 19.4% for the year. The NASDAQ 100 index suffered even more with losses over 32.8%. Additionally, the Bloomberg US Aggregate Global Fixed Income Index had one of its worst years on record, ending the year down approximately 16.2%.

The Fourth Quarter

Despite a volatile December, global stocks and bonds generally advanced in the fourth quarter of 2022 amid expectations that central banks might change course. However, the fourth quarter rebound wasn’t enough to offset the year-to-date effects of high inflation, rising interest rates, geopolitical unrest, and growth uncertainty. Accordingly, most stocks and bond indices posted steep losses for 2022.

Market optimism rebounded in October and November as inflation’s pace eased and expectations for the Fed to potentially pause their hiking campaign mounted. However, the market may have been a bit early in its enthusiasm as the Fed remained steadfast in its rate-hike outlook for 2023, and the market sold off in December.

All in, gains in October and November gave the S&P 500 index a 7.6% return for the fourth quarter. While a welcome reprieve, the S&P 500 ended the full year with its worst performance since 2008, but well off the nearly 25% drawdown low in October.

Foreign Markets

Non-United States developed market stocks also declined slightly in December, but overall, they rallied in the fourth quarter to sharply outperform US stocks. Emerging market stocks also outperformed the US for the quarter.

Fixed Income

United States treasury bonds ended the quarter modestly lower in price and higher in yield, but bonds generally delivered positive fourth quarter returns.


Annual United States headline and core inflation moderated in the quarter. Against this backdrop, the Fed raised the federal funds rate 75 basis points (bps) in November and downshifted to a 50-bps rate hike in December.

Central banks in Europe and the United Kingdom also raised rates 50 bps in December as annual inflation eased, but still topped 10%.

The Year in Review

2022 was a roller coaster for investors as international conflicts increased, highlighted by the Russian invasion of Ukraine and the consequences of rising energy prices and disruptions to everything from fertilizer to food.

Heightened inflationary pressures this year led to aggressive rate hikes from central banks, causing equity price valuations to fall dramatically.

While inflation did fade some at year end, the widespread effects of COVID-19 continue to impact consumers, businesses, and supply chains. Additionally, elevated political uncertainty has shifted the landscape of economies globally.

Volatility in the markets was high all year with the S&P falling several times into bear market territory.

The Federal Reserve

To respond to the high levels of inflation brought on by easy monetary policies implemented amid COVID-19 relief initiatives, the Fed raised the federal funds rate by 425 bps in the space of nine months in 2022. This is the second fastest hiking cycle since World War II.

A faster rate hiking cycle occurred under Chairman Paul Volcker in late 1980 and 1981, when the Fed hiked the discount rate by 400 bps in eight months.

In September 2022, the Federal Reserve began a program of quantitative tightening, shrinking its roughly $9 trillion balance sheet by almost $100 billion a month, tightening liquidity conditions.

In addition to quantitative tightening and higher rates, weaker equity markets and the slumping housing market have also helped tighten financial conditions and decrease speculative excesses in financial assets.

Though there has been some constructive news on inflation, the Fed remains steadfast in their resolve to bring inflation back down to their 2% target.

Fixed Income

The bond market went through a huge resetting of interest rates in 2022.

Coming into the year, short-term interest rates were still near the pandemic-era lows. The Fed began what was supposed to be a gradual shift to tighter monetary policy with a 25 bps rate hike in March 2022, as economic growth recovered.

However, gradualism soon gave way to rapid tightening by summer, as inflation surged on the back of:

  • Supply and demand imbalances
  • A resilient economy
  • The spike in oil prices due to the war in Ukraine

While the declines in bond prices was much faster than anticipated, at current levels, they likely signify higher future returns.


Employment data remained strong throughout 2022, and the year closed with an unemployment rate of 3.5%, which is considerably below the long-term average. Wage growth has remained sticky, but the December non-farm payroll report showed increases were less than expected.

Job growth has remained strong in the services sector—especially hospitality—while there have been wider spread reports of lay-offs in:

  • Technology
  • Financials
  • Communication services

If employment remains strong and wages continue to increase and offset inflation pressures, it’s possible to avoid a recession. The problem for the Fed is the labor market. Strong employment and wage growth add to inflationary pressures. Over the last year, unit labor costs increased 6.1%, with a significant decline in labor productivity.

Market Perspective in a Disappointing Year

While the results for investors in 2022 are disappointing, if we zoom out beyond this single year, we have a better perspective.

Looking at just the S&P 500, the index returned 26.9% over the three-year period between 2020 and 2022, despite last year’s downturn. Most surprisingly the index returned 18.4% in 2020, a year largely remembered as the height of the COVID-19 pandemic, indicating it’s hard to time markets.

Looking Ahead

A near-term recession is too close to call. However, we’ll likely face many of the same risks and uncertainties of 2022 in 2023.

For example, it remains to be seen how far the Fed will go in its campaign to curb inflation. We know the Fed’s actions work with lagged effects, so it’s difficult to anticipate how higher interest rates will affect consumer spending and company earnings.

Certainly, geopolitical risks remain given the war in Ukraine, and its unknown how China’s shift away from its zero-COVID-19 policy will impact the global economy.

History does offer some perspective, though, for investing in tough times. While we can likely expect more volatility in 2023, we shouldn’t forget the market has already priced in lower expectations, and valuation ratios are more attractive than they were a year prior.

If we consider previous periods when economic uncertainty was high, we’ve seen that the market has historically rallied well before those uncertainties subsided—once light appeared at the end of the tunnel and signs of improving conditions were apparent.

Market volatility can be unnerving, but long-term investors have historically been rewarded for staying invested and not trying to time market actions.

Though the markets have been challenging, maintaining investment discipline—by staying invested and sticking to your plan—will be of crucial importance.

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For personalized insight or if you have questions about how changing markets could impact you, please contact your Moss Adams advisor.

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