Recapping a challenging year and looking ahead

By: Edward Jones
DEWITT, Mich. - Dec. 28, 2022 - PRLog -- 2022 proved to be the most challenging year for investors in more than a decade as multiple headwinds hit the economy and the markets1. Four-decade-high inflation, aggressive central bank tightening, a war in Ukraine and lockdowns in China, all contributed to a rapid adjustment in interest rates, valuations, and sentiment. As a result, most major equity indexes peaked on the first trading day of the year and have been on a downtrend since, with the S&P 500 navigating its longest bear market since 20081. Also vulnerable to the inflation surge and the withdrawal of monetary stimulus, bonds experienced their largest sell-off since records started in 19261.

With investors ready to turn the page on the calendar, we review some of the milestones that defined the markets over the past 12 months and offer some perspective on how these factors could evolve.

Growth slowed to a halt, but consumers kept spending
  • The U.S. economy contracted in the first half of the year with GDP declining in the first and second quarters, stoking worries of recession. However, sizable swings in inventories and net trade played outsized roles in the first-half weakness. Consumer spending – which accounts for 70% of GDP – stayed healthy, in spite of rising prices and interest rates1. Last week's upward revision to third quarter GDP suggests that economic activity rebounded nicely in the second half of the year. The largely undeterred consumer, together with the historic low unemployment rate, are inconsistent with a 2022 recession.
    • Looking ahead: We think that the economy will soon be tested as the full impact of the Fed's restrictive policies has not completely filtered its way through. Financial markets bared the brunt of the rise in borrowing costs in 2022, but the real economy could be next as consumers and business pull back on spending.
Labor market stayed tight
  • The labor market was the brightest spot in a slowing economy. After averaging about 390,000 job gains a month in 2022, total employment returned to where it stood before the pandemic, while the unemployment rate declined back to 3.5%, a 53-year low1. Strong employment continues to support incomes but when viewed through the lens of inflation it is a cause for concern for central banks.
    • Looking ahead: We doubt the labor market will remain unscathed next year, but the historically high amount of job openings will probably provide some cushion against a sharp spike in unemployment. We think that the unemployment rate will rise but stay below 5%.
Sources: 1. Bloomberg, Edward Jones

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