Market Week: January 3, 2023

The week in review

  • Case-Shiller U.S. HPI: -0.50% m/m

The week ahead

  • Mfg. and Services PMIs
  • Light vehicle sales
  • FOMC minutes

Thought of the week

2022 was a difficult year for the public markets, as positive stock-bond correlations offered investors little to no protection against the macroeconomic backdrop of persistently high inflation, hawkish monetary policy and heightened geopolitical tensions. In terms of asset class performance, commodities led the way in 2022, as the conflict in Ukraine and only gradually improving supply chains boosted commodities prices.

Equities struggled in 2022, primarily due to higher rates compressing valuations and a weakening outlook for corporate earnings amid recessionary fears. U.S large cap finished the year down 17.9%, while their small cap peers ended the year down 20.2%. REITs, which had a stellar 2021, felt the pain of tighter monetary policy and declined over 20%, as the demand for real estate cools.

In the international markets, DM equity and EM equity declined 13.5% and 19.6%, respectively. The conflict in Ukraine continues to weigh heavily on the European markets, with the UK officially entering a recession and the European Union expected to do so in 2023. Furthermore, the Bank of Japan’s surprise rate hike announcement in early December added further pressure in developed markets. Turning to emerging markets, China continues to dominate the headlines. While policy officials have recently eased COVID-19 restrictions, the country remained in lockdown for most of 2022.

Lastly, similar to equities, the bond markets felt the pressure of higher interest rates. U.S. fixed income markets finished the year down, as the Federal Reserve holds steady with its hawkish policy stance. Global high yield finished the year down as well, primarily due to a flight to quality and an increase in downgrades.

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