Year in Review – Twelve Months Ending June 30, 2022

September 29, 2022

As much of the world adapted to and then attempted to move past the pandemic, policymakers and investors were left to ponder the economic impacts of the global tragedy. In some cases, the governmental efforts to combat the pandemic worked all too well. Demand exceeded supply for numerous commodities, goods, and labor, leading to an inflationary surge that rattled the Federal Reserve as well as markets.

Russia’s assault on Ukraine immediately placed further pressure on prices as well as depressing consumer confidence. Worries about recession came to the forefront in spring, rattling markets severely. As stagflation became one of the most searched words on Google, even well-diversified investors were left reeling.

Major Economic Events

The post-pandemic global economic recovery decelerated rapidly in 2022. The US economy slowed, Europe shuddered from the impact of the Russian assault on Ukraine and the surge in energy costs, while periodic lockdowns in China depressed demand while snarling the supply chain and contributed further to the inflationary pulse.

Covid variants slowed the recovery, although widespread lockdowns did not occur and economic activity remained vibrant. Unemployment fell steadily and wages rose. A major surprise was the surge in demand for goods that caught manufacturers and suppliers off-guard. Supplies ran short of numerous products, most prominently new and used autos. Inflation spurted higher, although the Fed’s reassurances about the “transitory” nature of the price rises seemed to reassure many. When “transitory” was dropped from the lexicon, investors at first barely blinked an eye. However, as inflation not only persisted but then accelerated to a pace not seen for generations, the Fed had no recourse but to admit the obvious and begin raising rates at a very rapid pace. The Russian assault on Ukraine then had a further impact on prices of oil, food, and other crucial commodities.

The Equity Markets

Global stock markets took a beating in 2022, with the selling particularly traumatic in April and June. Rising interest rates pressured stocks, with the heaviest impacts falling on technology and other growth stocks.

The 2022 sell-off was broad-based and left few sectors unscathed. The exception was the conventional energy sector. Economically sensitive small and mid-cap stocks weakened as rising interest rates brought recessionary fears to the forefront.

The American stock market performed far better than its international counterparts, reflecting the greater resilience of the US economy and the relative optimism of American investors.

Emerging markets’ relative performance improved during 2022. However, results over the full twelve-month period remained poor. China, which comprises roughly 40% of the emerging market index, continued its zero-covid stance that restricted economic activity dramatically. A government assault on its home-grown technology firms as well as a crackdown on property firms also took a toll on Chinese equities. Any signs of relief from these restrictive policies have been greeted with relief from investors, although the capricious nature of Chinese authorities continues to be a threat. The Russia/Eastern Europe segment of the emerging market landscape was decimated by Russia’s attack, and subsequent economic isolation.

REITs prices fell in 2022, as tightened financial conditions spooked investors. International REIT gains tracked the malaise engulfing global economies.

Natural resource stocks benefited from a favorable supply/demand situation. Despite a large decline in June, prices for resource equities finished the year with substantial gains. Demand in numerous commodities, in particular oil, took suppliers by surprise and pushed prices higher. Additionally, geopolitical developments are restricting the supply of fossil fuels at a period when alternative energy is not yet able to fill the void. Alternative energy stocks, although seemingly well-positioned for the long-term, endured a poor period, wounded by a combination of tightening financial conditions, political setbacks, and a hangover from the (excessive?) exuberance these equities enjoyed as they posted spectacular gains in 2020.

Overall, the effects of diversification from the traditional S&P 500 index were negative. Small and mid-cap stocks lagged, and international equities failed to measure up. Gains in natural resource stocks were a lonely bright spot on the investment landscape.

The Fixed Income Markets

Interest rates rose dramatically as inflation reached levels not seen in decades. Bond prices move inversely to interest rates, and thus fell. The overall bond market experienced a stunning loss: -10.4%. Only at the very end of the twelve-month period did bond investors begin to show confidence that the inflation-fighting policies of the Fed would prove sufficient. A relatively safe harbor for bond investors in this treacherous environment were inflation-protected Treasuries. International bonds fared poorly. The dollar’s rise exacerbated the negative impact from the worldwide inflationary pulse. Cash and similar investments were a safe haven, even as yields remained very low when compared with the rate of inflation.