Wentz Weekly Insights
Stocks Fall 19.4% in 2022, How Will 2023 Shape Out?

Last week was a very quiet week from a headline and trading perspective with volume on the NYSE roughly 75% of the daily average. Partially due to the lack of other market moving events, the main focus last week was China and how the easing of its “zero-Covid policy” is leading to a surge in positive cases, but at the same time optimism over it reopening its economy. The idea is this will lead to a boost in economic growth. However, the consequence is the increasing fear that will lead to higher inflation. In recent days, the thought has been if China suddenly lifts many restrictions in place it would lead to a spike in demand, and we know from experience over the past two years that a spike in demand in the U.S. led to significant inflationary pressures.
This created a large divergence between value and growth with investors punishing growth stocks over fears of higher interest rates (that would be needed to kill inflation) and favoring value stocks like dividend payers and consumer staples/defensive stocks. This is how much of 2022 played out…
It was a year in which all major stock indices closed lower and bond yields surged as the Fed raised interest rates. Stocks started the year at a new record high on the first trading day of the year (exactly one year ago today) but moved lower from there with the major U.S. indices finished as follows: Dow -8.78%, S&P 500 -19.44%, Russell 2000 -21.56%, and NASDAQ -33.10%.
After a very strong 2020 and 2021, growth gave back much of the gains and underperformed value by about 23% with value -7.35% and growth -30.09%.
The best sector, by far, was energy with a 59.04% gain as oil prices rose 6.7% to finish at $80/barrel, but this was after it hit a high of $130.50 in March shortly after Russia’s invasion of Ukraine. All other sectors finished the year lower with the worst sectors being communications service with a 38.25% loss. The best performing stock in the S&P 500 came from the energy sector – Occidental Petroleum with a 119.1% gain. The worst performing stock in the index was Generac Holdings, which produces generators, with a 71.4% decline.
The dollar played an important role as well, dragging stocks down after rising to the highest level since the early 2000’s, however fell about 9% in the second half of the year, but still closed the year out 7.9% higher than where it started.
Finally, fixed income markets saw one of the worst performances on record. In effort to fight decades high inflation, the Fed embarked on an aggressive rate hiking cycle, moving interest rates from 0% to 4.50%. This resulted in higher yields on bonds, but when rates go up, bond prices go down. The sharp rise in rates resulted in a 25.53% decline in longer-term bonds, a 9.64% decline for medium-term bonds, a 11.11% decline for high yielding bonds (bonds with low credit quality), and a 7.59% decline for municipal bonds. By the latter half of the year, the yield curve inverted as well as the 10-year Treasury yield of 3.88% inverting with the Fed’s Fed funds rate of 4.33%.
As far as 2022, we think there may be additional downside risks to the markets, particularly in the first half of the year, and we need to see some sort of capitulation in order for us to feel more confident the markets have formed a bottom. Stocks are forward looking, and with that in mind, may look to a recovery in 2024 and begin to price that in toward the end of the year. What are strategists saying? Of 22 surveyed, the average 2023 year end S&P 500 forecast is 4,080, representing a 6.3% increase. However, there is an extremely wide range of estimates, with the low being 3,400 and the high 4,750. This speaks to the amount of uncertainty that remains. For the start of 2023, we remain overweighting defensive positions, but stand ready to rebalance when the time is right.
Interested in our full 2023 market and economic forecast? See the dates and times below in the “WFG News” section on our upcoming 2023 Economic and Market Outlook – Inflation, Interest Rates, and a Slowing Economy – How Will 2023 Shape Out?
Week in Review:
Stocks were closed Monday in observation of Christmas and opened Tuesday relatively unchanged, falling nearly 1% in morning trading but recovered from the lows to finish down 0.40% for the S&P 500. Growth stocks continue to struggle though, with the NASDAQ down a steeper 1.38%. It was an uneventful day with trading volume on the NYSE about 75% of the 30-day average. The main headline on the day was China continuing with its easing of its strict Covid policies and dropping all travel restrictions beginning in January. However, millions of Chinese are catching the virus every day, one day reportedly reaching 37 million new cases, causing nations around the globe to consider or even implementing travel restrictions on those coming from China.
Growth stocks underperformed again on Tuesday with a renewed concern over inflation. As China loosens its Covid restrictions, there is optimism global growth will pick up, but the concern is a sudden increase in demand could bring additional inflationary pressures. All sectors were lower on the day as stocks closed near the lows with the S&P 500 down 1.20% while Treasury yields rose with the 10-year yield approaching 3.90%, the highest since November 9. Later in the day Wednesday, the U.S. said it would require travelers from China to show a negative Covid test before entering the country, following moves from many other nations.
Stocks reversed the losses of the past several days and moved higher on Thursday off no real news. Jobless claims in the morning were relatively unchanged, at very low levels representing the tight labor market, however continuing claims are at the highest levels since the beginning of the year. China acknowledged Covid will continue to spread throughout the holidays but sounded optimistic when it says it believe it peaked in several of its largest cities, while countries continue to implement new restrictions from Chinese travelers. About 90% of NYSE volume was to the upside and growth outperformed value with the NASDAQ gaining 2.59% while the Dow gained just 1.05%.
Thursday’s strength was unable to carry into Friday in what was another very quiet day off trading, however stocks recovered from the lows of the day with the S&P 500 finishing down 0.25%.

Recent Economic Data

  • Data from the S&P Case Shiller Home Price Index showed home prices declined 0.5% before seasonal adjustments in October and declined 0.3% after seasonal adjustments. All 20 cities in the index reported a decline in the month. Compared to a year earlier, the home price index increased 9.2%, slowing again from the 10.7% rate in the previous month, and down sharply from the record high annual increase of 20.6% in March this year. Miami (+21%), Tampa (+20.5%), and Charlotte (+15.0%) continue to be at the top with Minneapolis (+5.9%), Seattle (+4.5%), and San Francisco (+0.6%) at the bottom. Cleveland home prices up 8.7% y/y.
  • For the week ended December 24, there were 225,000 unemployment claims, a slight increase of 9,000 from the week prior but remaining around very low levels that suggest a still tight labor market. The four-week average was 221,000, relatively unchanged from the prior week. The number of continuing claims was 1.710 million, up another 41k from the prior week and rising 10 of the past 13 weeks from a post-Covid low of around 1.300 million.
  • Data supporting the rate of inflation coming down is the trend in money supply in the economy. In November, the money supply (M2) fell 0.3% and is now 1.8% down from its highs in March 2022 and near the levels it was last at in October 2021. It sounds like a small move especially when you compare it to the 39% increase since February 2020, right before the pandemic started, but is welcoming considering the sustained increases seen 2020-2022.
  • The National Association of Realtors’ pending home sales index, which is considered a leading indicator on the housing market as it looks at home sales based on contract signings, fell 4% to 73.9 in November for the second lowest reading ever in the past 20 years.
  • The average 30-year mortgage rate rose to 6.42% in the week ended December 29, up from 6.27% the prior week after seven consecutive weeks of declines. The high this year was 7.08% the beginning of November and the low was 3.11% where the 30-year rate started the year.

Company News

  • Shares of Southwest Airlines were lower after the company had to cancel nearly three-fourths of its scheduled flights over the Christmas holiday weekend and following days. The Department of Transportation later said it was investigating Southwest over the “disproportionate and unacceptable rate of cancellations.” It wasn’t until Friday the company said the flight schedule returned to normal, without the disruptions.
  • The Information is reporting Amazon is planning to create its own stand-alone sports streaming app after having made multiple investments into live sports, but says it is not clear when it would be available or if it will ultimately be rolled out. CEO Andy Jassy has in the past said live sports would be an area that will keep seeing spending even as the company is cutting costs.
  • Tesla stock fell after it said it produced 439,000 vehicles and delivered 405,000 vehicles in Q4, which represented a 31% increase from a year earlier, but missing the estimate of 421,000 vehicle deliveries. Inventories grew about 34,000 vehicles to now stand at about 78,000.

WFG News

New Year Checklist:
The new year is a great time to review financial planning items such as the following:
  • Retirement plan contributions: Did you know 2023 IRS limits have been increased? In addition to tax brackets being updated, the IRS increase the amount individuals can add to retirement plans. If you are in a workplace retirement plan, the annual contribution limit was increased
  • 401k/403b/other qualified plans – Increased to $22,500 from $20,500
  • IRAs (including Roth IRAs) – Increased to $6,500 from $6,000
  • Simple IRAs – Increased to $15,500 from $14,000
  • Over the age of 50? Catch up contributions were increased as well. If over the age of 50 you can contribute an additional $7,500 to qualified plans (401k, etc), up from $6,000, an extra $3,500 to Simple IRAs, up from $3,000, however the catch up for IRAs is unchanged at $1,000.
  • Haven’t contributed to an IRA for 2022? Remember you have up until the time you file your taxes, or April 18, to make a 2022 IRA contribution.
  • Budget: Review 2022’s budget and see how your money has been spent to get a better idea of your spending patterns and create a 2023 budget. This could be an opportunity to find where you could save money to find more options for savings and/or investments. This could also be a chance to review debt to help prioritize working down those balances.
  • Review retirement accounts: Look at rebalancing accounts to match the desired asset allocation to your goals, objectives, and risk tolerance, as well as the current environment. Need help reviewing outside accounts or workplace retirement plans (401k’s)? Do not hesitate to reach out and ask for help!
Economic & Market Outlook Meeting
Wednesday, January 18 – 6:00 pm – WFG Auditorium in Hudson, OH
Tuesday, January 24 – 12:00 pm – WFG Auditorium in Hudson, OH
Wednesday, January 25 – 6:00 pm – WFG Auditorium in Hudson, OH
Wentz Financial Group will be holding its semi-annual Economic and Market Outlook Seminars on the dates above. Join us as we recap a volatile 2022, explain how we got to where we are today, as well as give our expectation and forecast on the economic and market environment and how that will affect portfolios in the challenging year ahead. We will have three seminar times, one during the lunch hour and the other two in the evening. Please RSVP by responding to this email or by calling the office at 330-650-2700. Seat are limited for each event and will be on a first come first served basis. A buffet style meal will be served approximately 30 minutes before each event.

The Week Ahead

This week will be another shortened trading week as markets were closed Monday in observance of New Year’s Day. Reports on the economic calendar focus mostly on the labor market with the job openings and labor turnover survey on Wednesday that is expected to show job openings fell to about 10 million from 10.33 million. This will be followed by the ADP employment report and weekly jobless claims on Thursday and the Department of Labor’s employment report on Friday where economists are expecting 200,000 new jobs were added in December and wage growth of 5.0% from a year earlier. Other economic data releases include PMI and ISM manufacturing index results, construction spend for November, motor vehicle sales for 2022, factory orders, and the release of the Fed’s December meeting minutes. The Fed may be back in focus with several public appearances by policymakers in the second half of the week. With fourth quarter now over, earnings results will start to come in with notable results from Walgreens, Conagra Brands, and Constellation Brands on Friday, before earnings season really kicks off next week with the big banks. Tech will be in the headlines as the Consumer Electronic Show, the biggest and most notable tech conference of the year, heads back to Las Vegas this week running from January 5-8. On the political front, the 118th Congress begins with lawmakers being sworn in and a floor vote will be held to determine Speaker of the House.