The markets ended a tough year declining 19.4% on a price return basis, the seventh-worst year since 1926. The year was marked by extremes with the highest inflation seen since the 1980s, the most aggressive tightening cycle in 40 years, a war in Ukraine, and COVID lockdowns in China. A recession is largely expected in the back half of 2023 as central banks continue to raise interest rates despite inflation cooling and the yield curve inverting. The unknowns around COVID lockdowns in China have been replaced with economic pressure as COVID spreads widely in a country with limited vaccination and natural immunity. Despite all these negatives, the U.S. job market remains strong with unemployment sitting at 3.5%. This year saw exuberance taken out of the highflying growth names as higher rates hurt longer duration assets with many of the 2020 market darlings falling greater than 80%. Higher rates also insured that bonds were not a safe place to hide with 2022 marking the fifth time since 1926 that both stocks and bonds declined in the same year and the first time, they both fell by over 10%. This was the worst return on a 60/40 portfolio1 since 1937. Commodities were the true winners of the year. The year ended with the collapse of FTX Trading Ltd., in the crypto space, leading to a flood of knock-on bankruptcies that caused severe reputational damage to the space and questions of the long-term viability. As we enter 2023, investor sentiment continues to sit in bearish territory registering a 2.9 out of 10 on the Bank of American Bull/Bear Indicator.
All major equity indices ended the year in the red on a total return basis with the Nasdaq Composite declining 32.5% followed by the S&P500 down 18.1% and the Dow Jones Industrial Average closing out the year with a loss of 6.9%. Nine out of the eleven sectors in the S&P 500 posted negative returns for the year, with Telecommunications and Consumer Discretionary down the most with returns of -39.9% and -37.0%, respectively. Energy and Utilities were the only sectors with positive returns gaining 65.4% and 1.6%, respectively. Mid-caps outperformed Large-Caps, which beat Small-cap names. Specifically, the Russell MidCap Index’s -17.3% return beat the large-cap Russell 1000 Index’s loss of 19.1% which was better than the small-cap Russell 2000 Index’s -20.5% return. Value stocks outperformed growth stocks with the Russell 1000 Value declining 7.6% compared with the Russell 1000 Growth Index’s loss of 29.1% over the year. Bonds were down for the year, with the Barclays Long-Term Treasury Index underperforming most equity benchmarks with a decline of 29.5%. The Barclays U.S. Aggregate did better with a decline of 13.0%. Commodities were up for the year, with the Bloomberg Commodity Index rising 13.8% while the dollar gained 8.2% and gold was largely flat at down 1.0% for the year. Oil prices hit a high of $123.70 early in the year but trended down ending the year at $80.26, up 6.7% annually. All major developed countries’ markets except for the United Kingdom and Australia ended the year down in local currency terms, with the US being the worst market with a total return of -18.1% followed by Hong Kong at -12.6%. The UK returned 4.6% during the year followed by Australia which was up 0.5%. Emerging market countries were mixed in local currency terms with Russia and China down 36.9% and 12.8%, respectively, while Indonesia and Brazil were up 5.8% and 4.7%, respectively.
The stock market rebounded in the fourth quarter offsetting some of the losses incurred earlier in the year. The Dow Jones Industrial Average rose 16.0% followed by the S&P500 gaining 7.6% while the Nasdaq Composite continued to decline 0.8%. Energy continued to lead in the quarter returning 22.7% followed by Industrials which were up 19.2%. Nine out of eleven sectors in the S&P 500 posted positive returns for the quarter with only Telecommunications and Consumer Discretionary declining. Mid-cap stocks outperformed Large-cap stocks, which beat Small-cap names. Specifically, the Russell Mid-Cap Index’s 9.2% return did better than the Russell 1000 Index and the Russell 2000 Index, which posted gains of 7.2% and 6.2%, respectively. Value stocks beat out Growth names in the quarter, as the Russell 1000 Value Index rose 12.4% compared to the 2.2% gain of the Russell 1000 Growth Index over the same period. Bonds were mixed with the Barclays Aggregate Total Return gaining 1.9%, while long-dated US Treasuries did worse, with the Barclays Long-Term Treasury Index declining 1.1%. The US Dollar Index lost 7.7% over the quarter, while oil stayed largely flat gaining only 1.0%. Bitcoin lost -14.7% while Gold gained 8.4%.
1The 60/40 portfolio here is 60% in the S&P 500 and 40% in 10 Year Treasuries via data from NYU.
All data sourced by Bloomberg.
BofABull & Bear Indicator (B&B): Sell when investor sentiment> 8.0; Buy when investor sentiment NASDAQ Composite Index is a market capitalization-weighted index that is designed to represent the performance of NASDAQ securities and it includes over 3,000 stocks. The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. The Dow Jones Industrial Average (DJIA) is an unmanaged index composed of 30 blue-chip stocks, each with annual sales exceeding $7 billion. The DJIA is price-weighted, reflects large-cap companies representative of U.S. industry, and historically has moved in tandem with other major market indexes, such as the S&P 500. The Russell® 2000 Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. The Russell Midcap® Index, an unmanaged index, measures the performance of the 800 smallest companies in the Russell 1000 Index. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. The Russell 1000 Growth® Index measures the performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value® Index measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values. The Barclays Long-Term Treasury Index includes publicly issued U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. The Bloomberg US Aggregate Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency). . Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule.
The views expressed in this commentary reflect those of Miller Value Partners analyst(s) as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results.
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