The S&P 500 (SP500) on Friday closed out a particularly painful year for Wall Street with an approximately 20% decline, its worst annual showing since the financial crisis in 2008.
The benchmark index ended 19.44% lower at 3,839.50 points, while its accompanying SPDR S&P 500 Trust ETF (NYSEARCA:SPY) shed 19.48%.
After three years of relentless gains – including through a pandemic – the S&P 500 suffered through a major bear market in 2022. The rollercoaster year saw a war between Russia and Ukraine, surging inflation, the Federal Reserve hiking rates for the first time since 2018 and subsequent worries that the central bank’s aggressive tightening would push the economy into recession. The labor market has remained resilient even as interest rates have risen.
“2022 marked the start of a new investment era with persistent inflation at above-average levels, secular factors keeping said inflation high, and central banks eager to fight inflation without repeating the mistakes of the 1970s and 1980s,” BN Capital’s Leo Nelissen told Seeking Alpha. “What worked between 2009 and 2021 suddenly didn’t work anymore. Bond yields surged, high-growth tech stocks sold off, and winners were fossil fuel companies among a wide range of value stocks,” he added.
Yields in 2022 surged to their highest levels since 2008. Furthermore, the yield curve inversion between the 2-year and the 10-year Treasury notes hit their widest level in four decades. The 2s10s yield curve has historically been an accurate leading indicator of recessions.
Megacap technology firms, along with other smaller but major names in the technology space, saw growth at a frenzied pace over the past three years, and especially through the pandemic as demand for digital services soared. But investors fled such stocks in 2022. On the contrary, energy prices soared to new highs and energy companies were some of the biggest winners of the year.
The Fed played a significant role in influencing the direction of markets in 2022. It raised rates seven times during the year, starting in March. That run included a 75 basis point rate hike for four straight meetings. Fed chief Jerome Powell earlier this month said that policymakers were committed to their aggressive path and hawkish stance to combat inflation.
With economic data through 2022 suggesting that the rising interest rates have yet to really cool the economy, worries have risen that the Fed will tighten policy too far which could lead to a recession. Heading into 2023, these concerns are expected to continue to weigh on sentiment.
“While we’re beyond peak inflation, 2023 is set to become another tough year for investors expecting a move back to normal. The Federal Reserve will have to keep fighting inflation, even if it means hiking into economic growth-slowing. This also means that stocks will look a lot less cheap once corporate earnings come down,” Nelissen said. “Essentially, we’re looking at a scenario where the Fed will remain aggressive until something breaks. The market knows this, which is why upside potential has become limited,” he added.
All 11 S&P 500 (SP500) sectors retreated in 2022, with the exception of Energy. Growth and heavyweight sectors Communication Services, Consumer Discretionary and Technology were the top three losers, shedding around 40%, 38% and 29% respectively. Defensive sectors Utilities, Consumer Staples and Healthcare fell the least. The Energy sector had an outsized gain of nearly 60%.
See below a breakdown of the yearly performance of the sectors as well as their accompanying SPDR Select Sector ETFs from Dec. 31, 2021 close to Dec. 30, 2022 close:
#1: Energy +59.04%, and the Energy Select Sector SPDR ETF (XLE) +57.60%.
#2: Utilities -1.44%, and the Utilities Select Sector SPDR ETF (XLU) -1.51%.
#3: Consumer Staples -3.17%, and the Consumer Staples Select Sector SPDR ETF (XLP) -3.32%.
#4: Health Care -3.55%, and the Health Care Select Sector SPDR ETF (XLV) -3.58%.
#5: Industrials -7.10%, and the Industrial Select Sector SPDR ETF (XLI) -7.24%.
#6: Financials -12.35%, and the Financial Select Sector SPDR ETF (XLF) -12.42%.
#7: Materials -14.06%, and the Materials Select Sector SPDR ETF (XLB) -14.27%.
#8: Real Estate -28.45%, and the Real Estate Select Sector SPDR ETF (XLRE) -28.72%.
#9: Information Technology -28.91%, and the Technology Select Sector SPDR ETF (XLK) -28.43%.
#10: Consumer Discretionary -37.58%, and the Consumer Discretionary Select Sector SPDR ETF (XLY) -36.82%.
#11: Communication Services -40.42%, and the Communication Services Select Sector SPDR Fund (XLC) -38.22%.
Below is a chart of the 11 sectors’ 2022 performance and how they fared against the S&P 500.
Image and article originally from seekingalpha.com. Read the original article here.