Highlights from the Global Markets in 4Q22
U.S. Equity: U.S. stock indices posted positive returns in 4Q as investor sentiment improved, but the YTD results remained dismal with most indices posting double-digit declines. The S&P 500 Index rose 7.6% for the quarter, lowering its YTD loss to 18.1%. Returns were quite mixed across sectors with Energy (+22.8%) being the best and Consumer Discretionary (-10.2%) faring the worst. Value stocks trounced growth for the quarter (Russell 1000 Value: +12.4%; Russell 1000 Growth: +2.2%) and the year (Russell 1000 Value: -7.5%; Russell 1000 Growth: -29.1%). In 4Q, the Growth Index was hurt by relative underweights in Health Care, Financials, and Energy as well as significant underperformance from Tesla (-54%) and Amazon (-26%). Looking back three years, growth is only modestly ahead of value (Russell 1000 Value: +6.0%; Russell 1000 Growth: +7.8%). Small cap stocks exhibited the same pattern in 4Q (Russell 2000 Value: +8.4%; Russell 2000 Growth: +4.1%) but value’s full year margin is smaller in the small cap space (Russell 2000 Value: -14.5%; Russell 2000 Growth: -26.4%).
Global ex-U.S. Equity: Global ex-U.S. markets also participated in the 4Q rally, and currency appreciation vs. the U.S. dollar further bolstered returns. The MSCI ACWI ex USA Index gained 14.3% (Local: +7.8%), reducing its YTD loss to 16.0% (Local: -9.6%). Across developed market countries, gains were broad-based and value outpaced growth, but by a smaller margin than in the U.S. (MSCI ACWI ex USA Value: +15.7%; MSCI ACWI ex USA Growth: +12.9%). Unlike in the U.S., all sectors of the ACWI ex USA Index delivered a positive return in 4Q of 10% or more.
Emerging Market Equity: Emerging markets (MSCI Emerging Markets: +9.7%; Local: +6.6%) also rebounded in 4Q, but returns were mixed across countries. While many nations were up double-digits, India (+2.0%) and Brazil (+2.4%) weighed on broad market returns. China (MSCI China: +13.5%) outperformed. Quarterly returns were also mixed across regions: Latin America (+5.7%), Emerging Europe (+43.1%), and Emerging Asia (+10.8%). The 2022 return for the MSCI EM Index was -20.1%.
U.S. Fixed Income: U.S. fixed income experienced its worst year—ever—in 2022, by a wide margin. The Bloomberg US Aggregate Bond Index sank 13.0%; the next worst calendar year was 1994 when the Aggregate fell 2.9%. The silver lining lies in the 4.68% yield-to-worst for the Index, up from 1.75% at the beginning of the year. The yield curve remained inverted at year-end; the 10-year Treasury yield was 3.88% and the 2-year yield was 4.41%. The inversion reflects investor expectations for the economy to slow and an eventual need for the Fed to lower rates. The fourth quarter brought some relief to bond investors as longer rates fell modestly and most “spread” sectors outperformed Treasuries. The Aggregate gained 1.9%. High yield corporates (Bloomberg High Yield Index: +4.2%) were star performers, but this Index was down 11.2% for the year.
Municipal Bonds: The Bloomberg Municipal Bond Index rose 4.1% in 4Q, dampening the year’s loss to 8.5%, the worst return in 20 years but ahead of most other fixed income sectors. The ratio of AAA municipal yields to the 10-year U.S. Treasury fell to 68%, below its 10-year average (88%). Outflows from municipal bond mutual funds were $122 billion in 2022, a record, while municipal bond ETFs saw inflows. Tax loss harvesting was a key driver of outflows, and some investors chose to reinvest in ETF options. Municipal supply was down in 2022, off roughly 20% from 2021, and 4Q issuance was the lowest in more than 10 years.
Global ex-U.S. Fixed Income: While rates across developed markets rose broadly in 2022, changes were mixed in 4Q. Rates fell in the U.K. but rose across most of Europe and in Japan. The Bloomberg Global Aggregate ex USD soared 6.8% (hedged: +0.2%) due largely to weakness in the U.S. dollar. Still, the YTD differential for hedged and unhedged investors is nearly 9% (unhedged: -18.7%; hedged: -9.8%).
Emerging Market Debt: Emerging markets also had a good quarter with the JPM EMBI Global Diversified up 8.1% and the local currency JPM GBI-EM Global Diversified up 8.5%. For the year, the indices were down 17.8% and 11.7%, respectively. As is typical for emerging markets, country returns varied widely but most were positive across both indices in 4Q.
Real Assets: Real assets as a group performed well in 4Q. The S&P GSCI Index rose 3.4%; Gold (S&P Gold Spot Price Index: +9.2%), REITs (MSCI US REIT: +5.2%), infrastructure (DJB Global Infrastructure: +9.6%), and TIPS (Bloomberg TIPS: +2.0%) all posted solid returns. Full year results remained poor, however, for most real assets outside of those related to energy. REITs posted the worst returns (MSCI US REIT: -24.5%) while MLPs (Alerian MLP Index: +30.9%) benefited from higher energy prices.
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