U.S. equities closed out 2022 in the red, and all three major indexes registered solid losses on a yearly basis. The stock market posted its worst yearly decline since 2008. Trading remained subdued in the final days of the year as volumes continued to be on the lighter side. Equity news remained in short supply, but Southwest Airlines continued to be in the headlines after saying its latest troubles will affect Q4 results. The economic calendar was also relatively quiet, with today's lone report showing a surprising rebound in manufacturing activity in the Chicago region. Treasury yields gained ground, and the U.S. dollar declined, while crude oil prices rose, and gold was slightly higher. Asian stocks finished out the year mixed in thin trading, and markets in Europe saw widespread losses, with the region posting the worst year since 2018.
The Dow Jones Industrial Average decreased 74 points (0.2%) to 33,147, the S&P 500 Index declined 10 points (0.3%) to 3,840, and the Nasdaq Composite went down 12 points (0.1%) to 10,466. In light volume, 2.9 billion shares of NYSE-listed stocks were traded, and 3.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.86 to $80.26 per barrel. Elsewhere, the gold spot price increased $3.80 to $1,829.80 per ounce, and the Dollar Index decreased 0.3% to 103.50. Markets ended slightly lower for the week, as the DJIA went down 0.2%, the S&P 500 dipped 0.1%, and the Nasdaq Composite lost 0.3%. The three indexes were noticeably lower for the year, ending its three-year winning streak, as the DJIA tumbled 8.8%, the S&P 500 dropped 19.4%, and the Nasdaq Composite plummeted 33.1%.
Southwest Airlines Company (LUV $34) continued to be in the headlines after executives at the troubled airline said that the systems failure it has endured will "certainly" affect Q4 results. The meltdown came in the wake of a powerful winter storm that resulted in airlines cancelling thousands of flights over the three-day holiday weekend. However, the problems for LUV worsened, as systemwide chaos stranded thousands of travelers during the holiday week, prompting scrutiny from the U.S. Department of Transportation and the Biden Administration. However, LUV said it expects to operate on a normal schedule beginning today, and that it will take several weeks to work through the significant number of reimbursement requests for affected passengers. Shares traded modestly higher.
Equity news remained in short supply in the final trading day of 2022, as the S&P 500 posted a decline of nearly 20% for the year. Although the index was down for the month of December, it was still solidly higher for the quarter, which is the first quarterly advance since Q4 2021. The markets continued to wrestle with the ultimate impact of aggressive Fed actions to try to combat inflation after earlier this month downshifting from a string of four-straight 75-basis point (bp) rate hikes to a 50-bp increase. The deceleration remained unusually aggressive, and the Fed signaled that restrictive policy will likely have to remain in place for longer and at a potentially higher "terminal rate" than expected.
Schwab's Chief Investment Strategist Liz Ann Sonders discusses in our latest, Schwab Market Perspective: When Will the Fed Brake?, how inflation trends are moving in a favorable direction, but the change is likely too slow for the Fed to take its foot off the brake anytime soon.
Regional manufacturing surprises to the upside
The Chicago PMI improved more than expected in December but remained in contraction territory (a reading below 50). The index increased to 44.9 from 37.2 in November, versus forecasts of a slight rise to 40.0.
Treasury rates were higher, as the yields on the 2-year and 10-year notes rose 4 bps to 4.42% and 3.88%, respectively, while the 30-year bond rate gained 5 bps to 3.97%.
Treasury yields have moved higher in 2022 amid the aggressive monetary policy tightening by the Fed and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her article, Fixed Income Outlook: Bonds Are Back, how we see opportunities in 2023 for the bond market to provide attractive yields at lower risk than we've seen for several years.
Please note: All U.S. markets will be closed on Monday, January 2, 2023 in observance of the New Year holiday.
Europe lower to close out 2022
Stocks in Europe were lower in the last trading session of the year, as the markets posted the worst year since 2018. Conviction remains hamstrung as the markets continue to grapple with uncertainty regarding the implications of high inflation that has fostered aggressive tightening of monetary policies around the world, as well as the ongoing war in Ukraine. Also, some uncertainty surrounding the reopening in China appears to have seeped into sentiment, as COVID cases in the country continue to rise. Economic data remains light, with CPI in Spain cooling in November, and housing prices in the U.K. rising but at a slower pace than the prior month. The euro and the British pound gained ground versus the U.S. dollar. Bond yields in the Eurozone were higher, but rates in the U.K. were mixed.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses his Top Global Risks of 2023, highlighting our top five risks that may define the global markets, considering that a new year almost always brings surprises of one form or another.
The U.K. FTSE 100 Index was down 0.8%, closing early in observance of the holiday. France's CAC-40 Index and Italy's FTSE MIB Index fell 1.5%, Germany's DAX Index and Spain's IBEX 35 Index declined 1.1%, and Switzerland's Swiss Market Index traded 1.2% lower.
Asia mixed in thin trading
Stocks in Asia finished out the year mixed in lackluster trading as the global markets continue to grapple with the economic impact of aggressive monetary policy tightening across the world. The monetary policy actions have been joined by the recent decision from the Bank of Japan (BoJ) to tweak its bond purchase program. The monetary policy decisions have boosted volatility in the global currency and bond markets. Geopolitical concerns remain elevated, with tensions rising between South Korea and North Korea. Also, optimism surrounding China's reopening has tempered, with investors fretting about a larger than expected drag on near-term economic growth, particularly amid the recent rise in COVID cases. In light economic data in the region, consumer prices in South Korea remained stable for November, albeit at elevated levels. In his article, Global Outlook: Recovery and Risk, Schwab's Jeffrey Kleintop notes how markets may continue to see volatility in 2023 as they navigate between global economic growth and inflation fears, with central banks' decreasing rate hikes and China's reopening.
Japan's Nikkei 225 Index finished flat, with the yen continuing to trim recent losses versus the U.S. dollar. Elsewhere, China's Shanghai Composite Index increased 0.5%, and the Hong Kong Hang Seng Index traded 0.2% higher. Australia's S&P/ASX 200 Index gained 0.3%, but India's S&P BSE Sensex 30 Index bucked the trend, declining 0.5%. South Korea's Kospi Index was closed for the End of the Year holiday.
Markets Close the Books on a Dismal Year for Stocks
As Father Time lowers the curtain on another year, the word that may aptly summarize 2022 is—volatility. The year started off in lackluster fashion, as investors fretted over only the possibility that the Federal Reserve may accelerate down the path of tightening. Those fears came to pass, as the Central Bank initiated the most aggressive rate hike campaign in decades, upping the target for its fed funds rate by a combined 4.25% within the span of seven meetings. The moves put upward pressure on Treasury rates, with the yield curve inverting for the first time since 2019 amid a rise in the 2-year note to levels not seen since mid-2007, ushering in heightened volatility and fanning the flames of recession worries. Central banks around the world followed suit, with the European Central Bank, the Bank of England, the Swiss National Bank and the Reserve Bank of Australia—to name a few—also applying pressure to the monetary policy accelerator.
Economic news throughout the year added to the uneasiness, with inflation—a driving factor behind the Fed's aggressiveness—hitting 40-year highs, while the housing sector suffered amid the meteoric rise in mortgage rates and lack of affordability. Communications Services and Consumer Discretionary stocks fared the worst during 2022, with Information Technology not far behind, while Energy was the lone bright spot amid the rally in crude oil prices throughout the year. The markets closed out the year with solid losses, as the DJIA tumbled 8.8%, the S&P 500 dropped 19.4%, and the Nasdaq Composite plummeted 33.1%.
Next week rings in a new year, and while it will have one less trading session in observance of the holiday, and the economic calendar will be slow to start, a number of key reports are slated for release. A look at business activity will come in the form of manufacturing and services reports from ISM and S&P Global. The labor market will be in focus, as the Job Openings and Labor Turnover Survey (JOLTS), the ADP Employment Change report, and initial jobless claims for the week ended December 31 will precede what is likely the marquee event of the week—the December labor report. Other items of note include construction spending, factory orders, the weekly read on MBA Mortgage Applications, and the trade balance.
The international economic calendar for next week will hold a host of manufacturing and services PMIs from across the globe, as well as: Japan—consumer confidence and employment figures. Eurozone—PPI, CPI, consumer and business confidence, and retail sales, along with German CPI, labor data, retail sales, and trade balance. U.K.—housing data.
Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.
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