2022 Market Recap
If there was one clear, dominant force that drove markets in 2022 it was the rate of inflation. Its surge to 40-year highs led the Fed to an unprecedented series of interest rate increases that quickly reversed the secular trend of ultra-low rates and easy money. The Fed’s benchmark lending rate jumped from 0%-0.25% at the beginning of the year to 4.25%-4.5% by year-end, far exceeding market expectations. Combined with post-COVID normalization of fiscal stimulus and the Fed’s quantitative tightening, the bond market cratered and stocks were sent into bear market territory. The MSCI All-Country World Index was down -18.4% in 2022, and the US aggregate bond index was down -13.0%.
High correlations between asset classes amplified portfolio pain, as there were very few places to hide. In fact, 2022 was one of only five calendar years in the past 100 years in which both U.S. Treasuries and the S&P 500 finished with negative returns. 2022 also saw increased volatility. The S&P 500 produced 46 daily moves of 2% or more in either direction, the most since the 2008-09 financial crisis.
Geo-politics played an outsized role in the markets this year as Russia’s war with Ukraine, two key commodity producers, sent energy prices through the roof. Owing to their dependence on Russian natural gas, Europe felt these price increases most acutely and may well fall into recession in 2023.
In Asia, China’s zero-COVID policy exacerbated global stagflation. The world’s second largest economy saw its growth rate fall to 3% in 2022, the second slowest pace since 1970. A massive property slump and regulatory tightening on the Internet and E-commerce industry were additional catalysts that pushed the MSCI China index down -43% (year-to-date) by the end of October.
Needless to say, 2022 was a historically bad year for balanced portfolios. The Accuvest multi-asset class CST portfolios were not immune to the pain felt in financial markets, but they significantly outperformed the blended benchmark of the MSCI All-Country World Index and the US Aggregate Bond Index.
As we move into 2023, we believe there is room for optimism. We advise investors to stay the course and keep long-term investment objectives and opportunities in mind. As we have written in a previous blog post entitled “Long-term Asset Class Assumptions: Markets Presenting Attractive Entry Points”, expected returns are significantly higher than they were just 12 months ago.
2022 Performance Review by Asset Class
Equities:
In equities, we were wary of sky-high valuations coming into the year, especially in the US. As such, we were overweight value stocks, particularly those with high dividend yields that could provide a welcome source of income. This served portfolios well as rising interest rates forced a revaluation of expensive growth stocks (investors began to prefer immediate and predictable profits to speculative earnings and growth in the distant future). Value stocks held up well in 2022 while expensive growth stocks were decimated.
In terms of Sectors, we maintained an underweight to the Consumer Discretionary and Technology sectors, preferring defensives such as Consumer Staples and Healthcare. Energy was one of the few positive performers this year, and a healthy weight in portfolios improved returns. Finally, we maintained a modest US overweight until late in the year, which helped performance (especially in the first half of the year as US Dollar strength reduced returns for US investors in international stocks).
While we were underweight Emerging Markets, exposure to this market segment was a pain point. Positions in the Emerging Market Internet and E-Commerce theme (EMQQ) and a brief mid-year rotation into MSCI China ETF (MCHI) detracted from returns.
Contributors to Equity Performance
Energy Sector
US Value
US Premium Income ETF
Detractors from Equity Performance
Emerging Market Internet and Ecommerce Thematic
ActiveBeta Emerging Market Equities
US Factor Rotation ETF
Equity Overweights
US Equities
Value Style Factor
Consumer Staples Sector
Equity Underweights
Technology Sector
Western European Equities
Japanese Equities
As we move into 2023, we are medium term bullish on equities and hold an equally weighted allocation to the asset class. We are particularly bullish on international stocks where a peak in the US dollar may usher in a long-awaited period of outperformance and relative strength (compared to the United States). Recent price action is beginning to confirm this investment thesis. Accordingly, equity portfolios have rotated towards an overweight allocation to International Developed and Emerging Market equities. Across all regions, we continue to favor high quality companies with strong pricing power trading at reasonable valuations.
Fixed Income:
In Fixed Income, our active tilt towards short-duration bonds contributed to outperformance against the fixed income benchmark in 2022. We positioned portfolios to take credit risk rather than interest rate risk and this was rewarded. On average, the Accuvest CST portfolios maintained a BBB+ Bloomberg composite credit rating and between 2.5 and 3 years of modified duration. In contrast, the US Aggregate Bond index is AA rated with 6.5 to 7.0 years of modified duration.
Shorter duration investments such as JP Morgan Ultra-Short Income ETF (JPST), iShares iBonds Investment Grade Target Term 2022 ETF (IBDN) and iShares iBonds High Yield Target-Term 2023 ETF (IBHC) helped deliver fixed income outperformance and capital preservation. Investments in Emerging Market Sovereign Debt (EDD) weighed on returns as investor risk appetite fell and the US dollar strengthened. The Interest Rate Volatility and Inflation Hedge ETF also detracted from performance as the yield curve inverted.
Contributors to Fixed Income Performance
Detractors from Fixed Income Performance
JPM Ultra-Short Income ETF
Investment Grade Target-Term 2022 ETF
High Yield Target-Term 2023 ETF
Emerging Market Sovereign Debt
Interest Rate Volatility and Inflation Hedge ETF
iBonds Investment Grade 2026 Target-Term ETF
Fixed Income Overweights
Fixed Income Underweights
Emerging Market Debt
Corporate Debt
Treasury Inflation Protected Securities (TIPS)
Government Debt
Duration
Securitized Debt
Currently, we are moderately underweight fixed income coming into the new year. Inflation is peaking but it remains elevated, therefore eroding real returns. Yields have risen to attractive levels, and we are moving portfolios towards this opportunity by extending the maturities of investment grade bonds. We continue to maintain a lower-volatility short duration profile compared to the benchmark, but portfolios are very well positioned to produce high income and predictable returns out to 2028.
Alternatives:
Our ability to be tactical and move into alternatives reaped rewards in 2022. Years of underinvestment across the commodity complex and accelerating inflation provided an excellent investment opportunity for real assets in 2022. Commodities ended up performing exceptionally well, particularly in 1H 2022 when uncertainty surrounding inflation and shortages from the war in Ukraine supported demand and prices. Portfolios benefited from exposure to a diversified commodity ETF (ticker PDBC) and a disciplined trend following approach to manage risk and harvest gains as commodity prices peaked. As a result, commodities helped us outperform the benchmark in 2022.
Currently, we are underweight commodities but continue to monitor trends for signs of price strength. We see value in this asset class but expect volatility over the medium term.
Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.
The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.