Amid inflation and market turmoil, here’s what went wrong (and right) this year.
Global Investment Strategy Group
Our Top Market Takeaways for December 16, 2022.
Market update
Broke Record
Markets look set to close the year the way they spent most of it: volatile, fixated on central banks, and worried about a recession.
Even though the data released this week more or less confirmed that inflation in the United States is past its peak, Chair Powell and the rest of the Federal Open Market Committee stuck to the inflation-fighting script at their December meeting.
“We will stay the course,” Powell said, “until the job is done.”
At the European Central Bank meeting on Thursday, Christine Lagarde was even more forceful. Her comments strongly suggested that the ECB intends to raise rates aggressively through next spring despite the clear risks to economic growth in the region.
It seems like the central bank script hasn’t changed because there does still seem to be an imbalance in the labor market, and average hourly earnings are rising at a pace that isn’t consistent with 2% price inflation.
But the latest U.S. CPI data show a shrinking number of upside inflation drivers, especially when you consider that the official shelter price data are likely lagging actual conditions by a significant degree.
When inflation is high and sticky, strong talk from central bankers gets taken seriously by markets. But when interest rates are already slowing down growth, and actual inflation is running at a pace that is consistent with targets, markets can start to sniff out the end of the tightening cycle.
INFLATION IMPULSES GETTING HARDER TO FIND
This graph shows the month-over-month change of U.S. headline and core CPI from January 2019 to November 2022. Headline started at 0.0% and rose to 0.4% by April 2019. It then fell below -0.5% in April 2020 before rising back to 0.5% by June. It dipped, then reached 0.9% in June 2021 and 1.3% in June 2022. By November 2022, it fell to 0.1%. Meanwhile, core started at 0.2% and remained relatively steady until reaching -0.4% in April 2020. It then rebounded to 0.6% in July 2020 and fell back to 0.0% in January 2021. It reached 0.9% in April 2021, 0.6% in January 2022, then 0.2% in November 2022.
The bond market, for example, doesn’t seem to believe the Federal Reserve will raise rates to over 5% like it says it will. Two-year bond yields are below the federal funds rate. Historically, this is a sign that investors think hiking cycles are over. The hawkish talk didn’t move longer-term rates either. Ten-year bond yields are at their lowest level since September.
Even though stock markets had a shaky end to the week, they are still well above the lows from October.
In our outlook, we argued that the real economy will have to deal with the consequences of 2022’s rate hiking cycle, but markets are likely to find their footing. Despite the equity market volatility, the broad reaction to this week’s central bank meetings seem to support that view.
Spotlight
2022 in Review
In our last note of the year, we want to take a look back on the year that was: challenges, tragedies, bright spots and all. So long 2022. We will see you in 2023!
KEY EVENTS FROM 2022
This is the 2022 roundup: Key events from 2022 in three charts. The first shows the S&P 500 Index level from January 2022 to December 2022, with annotated events along the way that slot into one of the following categories: central banks, markets, virus, economy, war, politics and culture. It began just under 4,800 and fell toward 4,400 by the end of the month. It rallied, then fell again to 4,170 by early March. It rose to 4,590 by early April and then fell again to 3,667 by mid-June before bouncing back above 4,300 in August. It then fell to a series low of 3,583 in mid-October and rose to end the series around 3,900. The second chart has the same annotations and shows the 2-year and 10-year Treasury yields from January 2022 to December 2022. The 2-year began at 0.7%, and rose to 2.7% by late April and 3.0% by the end of June 2022. It continued to rise from here to a high of 4.7% in November before falling to 4.2% at the end of the series. Meanwhile, the 10-year began at 1.6%, and rose to 3.0% by May 2022 and 3.5% by June 2022. It fell to 2.7% in August before rising to 4.2% in November. It then fell in December to end the series at 3.4%. Finally, the third chart, with the same annotations as well, shows the price of WTI crude oil from January 2022 to December 2022. It began around $75 and rose to a high of $124 by early March 2022. It dipped to $94 in April and rose to around $120 by early June. From here, it fell to $77 by the end of November before the price then bounced back to $93 at the start of November. It then declined to $75 by the end of the series. • 1 The S&P 500 makes an all-time high and Apple becomes the first U.S. company to reach $3T market cap • 2 U.S. new COVID cases peak at 1.2MM per day • 3 Meta (nee Facebook) loses $250B in market cap, the largest one-day drop in history • 4 The LA Rams defeat the Cincinnati Bengals to win Super Bowl LVI • 5 Russia invades Ukraine • 6 Crude oil reaches a peak of $124/bbl • 7 McDonald’s and many other multinational corporations pull out of Russia • 8 Cristiano Ronaldo becomes the official top goal scorer of all time • 9 The Federal Reserve raises its policy rate for the first time since 2018 • 10 Shanghai closes all non-essential businesses • 11 The 2-year–10-year yield curve inverts for the first time since 2019 • 12 The Biden administration announces the largest release in history from the Strategic Petroleum Reserve • 13 Senate approves the appointment of Ketanji Brown Jackson, the first Black woman to serve on the U.S. Supreme Court • 14 U.S. GDP contracts for the first time since the onset of the pandemic in 2020 • 15 The Fed hikes +0.50% for the first time since 2000 • 16 TerraUSD collapses, and the crypto market loses $200B • 17 The European Commission adopts the REPower EU plan for affordable, secure and sustainable energy • 18 After two months of lockdowns, Shanghai “reopens” with mobility restrictions lifted for most residents • 19 The European Central Bank announces an end to its longstanding quantitative easing scheme • 20 The Biden administration lifts COVID-19 testing restrictions for international travel • 21 U.S. average gas prices hit $5/gallon for the first time on record • 22 Google searches for the word “recession” overtake “inflation” • 23 S&P 500 enters its 13th bear market since WWII • 24 The Fed raises its policy rate by +0.75% for the first time since 1994 • 25 The U.S. unemployment rate reaches the lowest point since 1968 • 26 Inflation hits a four-decade high at 9.2% YoY • 27 The Biden administration passes the Inflation Reduction Act • 28 The Euro reaches parity with the U.S. dollar • 29 The average gas price per gallon in the United States breaches $5 for the first time on record • 30 The Biden administration announces its student loan forgiveness program • 31 Queen Elizabeth II passes, and King Charles III ascends the throne • 32 Carlos Alcaraz is the youngest male in history to win the U.S. Open • 33 Patagonia founder donates 98% of the company • 34 The U.S. dollar peaks • 35 Elon Musk closes his acquisition of Twitter • 36 U.S. mortgage rates surpass 7% for the first time in 20 years • 37 Verstappen sets F1 record for most wins in a season • 38 Taylor Swift becomes first artist to claim entire Top 10 on Billboard Hot 100 • 39 Fed officially executes the most aggressive tightening cycle since the 1980s • 40 The Houston Astros defeat the Philadelphia Phillies to win the World Series • 41 COP27 Conference takes place • 42 “Red Wave” fails to materialize at U.S. midterm elections • 43 The Paul G. Allen art collection sells for $1.5B in a single event, the largest sale in auction history • 44 FTX files for bankruptcy as CEO Sam Bankman-Fried resigns • 45 Bob Iger returns as Disney CEO • 46 Morocco becomes the first African team to reach a FIFA World Cup semi-final • 47 The Biden administration announces milestone on fusion energy, paving the way for further clean energy innovation • 48 2-year and 10-year Treasury yields see their biggest calendar year jumps on record • 49 The Fed slows its pace of rate hikes, delivering “just” a 50-basis-point hike • 50 A record number of CEO survey respondents expect a U.S. recession next year
EVENT LEGEND
This table shows the 50 events that occurred in 2022. • 1 The S&P 500 makes an all-time high and Apple becomes the first U.S. company to reach $3T market cap • 2 U.S. new COVID cases peak at 1.2MM per day • 3 Meta (nee Facebook) loses $250B in market cap, the largest one day drop in history • 4 The LA Rams defeat the Cincinnati Bengals to win Super Bowl LVI • 5 Russia invades Ukraine • 6 Crude oil reaches a peak of $124/bbl • 7 McDonalds and many other multinational corporations pull out of Russia • 8 Cristiano Ronaldo becomes the official top goalscorer of all time • 9 The Federal Reserve raises its policy rate for the first time since 2018 • 10 Shanghai closes all non-essential businesses • 11 The 2-year 10-year yield curve inverts for the first time since 2019 • 12 The Biden administration announces the largest release in history from the Strategic Petroleum Reserve • 13 Senate approves the appointment of Ketanji Brown Jackson, the first Black woman to serve on the U.S. Supreme Court • 14 U.S. GDP contracts for the first time since the onset of the pandemic in 2020 • 15 The Fed hikes +0.50% for the first time since 2000 • 16 TerraUSD collapses and the crypto market loses $200B • 17 The European Commission adopts the REPower EU plan for affordable, secure and sustainable energy • 18 After two months of lockdowns, Shanghai “re-opens” with mobility restrictions lifted for most residents • 19 The European Central Bank announces an end to its long-standing quantitative easing scheme • 20 The Biden administration lifts COVID-19 testing restrictions for international travel • 21 U.S. average gas prices hit $5/gallon for the first time on record • 22 Google searches for the word “recession” overtake “inflation” • 23 S&P 500 enters its 13th bear market since WWII • 24 The Fed raises its policy rate by +0.75% for the first time since 1994 • 25 The U.S. unemployment rate reaches the lowest point since 1968 • 26 Inflation hits a four-decade high at 9.2% YoY • 27 The Biden administration passes the Inflation Reduction Act • 28 The Euro reaches parity with the U.S. dollar • 29 The average gas price per gallon in the United States breaches $5 for the first time on record • 30 The Biden administration announces its student loan forgiveness program • 31 Queen Elizabeth II passes, and King Charles III acends the throne • 32 Carlos Alcaraz is the youngest male in history to win the U.S. Open • 33 Patagonia founder donates 98% of the company • 34 The U.S. dollar peaks • 35 Elon Musk closes his acquisition of Twitter • 36 U.S. mortgage rates surpass 7% for the first time in 20 years • 37 Verstappen sets F1 record for most wins in a season • 38 Taylor Swift becomes first artist to claim entire Top 10 on Billboard Hot 100 • 39 Fed officially executes the most aggressive tightening cycle since the 1980s • 40 The Houston Astros defeat the Philadelphia Phillies to win the World Series • 41 COP27 Conference takes place • 42 “Red Wave” fails to materialize at U.S. midterm elections 43 The Paul G. Allen art collection sells for $1.5B in a single event, the largest sale in auction history • 44 FTX files for bankruptcy as CEO Sam Bankman-Fried resigns • 45 Bob Iger returns as Disney CEO • 46 Morocco becomes the first African team to reach a FIFA World Cup semi final • 47 The Biden administration announces milestone on fusion energy, paving the way for further clean energy innovation • 48 2-year and 10-year Treasury yields see their biggest calendar year jumps on record • 49 The Fed slows its pace of rate hikes, delivering “just” a 50-basis-point hike • 50 A record number of CEO survey respondents expect a U.S. recession next year
Your J.P. Morgan team is here to help you understand these insights – and our outlook for the year ahead – in the context of your financial plan.
All market and economic data as of December 2022 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
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