ATTIVO
End of year Market Summary
Market Summary – Year End 2022
As the Christmas period draws to a close, we’re reflecting on the events of 2022 and the drivers of the significant volatility we have seen in financial markets across the globe.
In Summary
- Various events across the year caused undue stress on global supply chains, causing price rises and increased inflationary pressures across all the major economies.
- In response to high inflation all major central banks have unanimously voted across the year to tighten monetary policy and increase interest rates to control rising prices.
- As a result of this, equity markets have struggled across the year with only a few sectors managing to achieve positive performance. An example is the energy sector within the S&P 500 – the only positive performing sector across the year.
Inflation – Russian invasion of Ukraine and COVID lockdowns in China
In February, Russia began its invasion of Ukraine following aggressive rhetoric from President Putin and the Russian Federation. As the conflict has escalated it has continued to cause global supply chain disruption, leading to prices of essential commodities like fuel and food increasing globally. These sharp price rises caused an increase in the rate of inflation seen in most of the major economies in 2022.
Further disruption to global supply chains were the result of the Zero COVID policy implemented by the Chinese Government. This resulted in strict lockdowns within its largest cities and ports, such as Shanghai, Shenzhen and Ningbo (which represent three of the five largest ports worldwide), causing large scale import and export issues which were felt across the global supply chain.
This disruption caused increasing pressure on prices and later increases in the Consumer Price Index (inflation) in the major economies. In the UK CPI rose throughout the year, from 5.5% in January to 10.7% in December.
In the US, the Consumer Price Index (inflation) has declined over the course of 2022 down from 7.5% in January to 7.1% in December, however, this is still well above the longer-term Federal Reserve target of 2%.
Central banks across the major economies react to rising inflation rates
In response to inflation the Bank of England, Federal Reserve and European Central Bank each raised interest rates throughout the year. This strategy aims to prevent spiralling inflation by increasing the price of consumer goods, and therefore reducing demand. In theory this should result in decreasing prices and an overall slowing of inflation across the major economies.
However, there are other consequences of this approach that should not be forgotten. The resulting increase in the overall cost of borrowing has had a major impact on the confidence of investors throughout the markets. Access to cheap capital to fuel growth had previously made small and medium-sized companies attractive to investors, but 2022 has seen this opportunity squeezed. As well as recessionary fears for 2023, there are concerns over the increased cost of the existing debt currently in circulation within the market.
Across the year, the Bank of England increased interest rates for the UK from 0.25% in January to 3.50% in December. In the US, the Federal Reserve made a slightly higher increase over the 12-month period, from 0.25% in January to 4.5% in December, and the European Central Bank rose rates from 0.00% in January and finished at 2.50% following their December meeting.
For each of the main central banks, their interest rate figure for December is the highest ever seen. These are the first large scale increases in 14 years, since the financial crash of 2008.
Liz Truss, Kwasi Kwarteng and the mini budget
In September, the newly appointed Prime Minister, Liz Truss, and the newly appointed Chancellor of the Exchequer, Kwasi Kwarteng announced a mini budget which implemented various tax cuts aimed at stimulating growth within the economy.
These measures were heavily scrutinised by the financial markets and international agencies including the IMF, who doubted the viability of the proposals. Confidence in the longer-term financial stability of the UK began to be questioned, leading to sharp falls in Pound Sterling and falling confidence in the bond and guilt markets. Intervention from the Bank of England in the form of buying long term guilts was needed to steady investor sentiment.
Liz Truss departed office after the shortest ever term as Prime Minister, to be replaced by Rishi Sunak. Most proposals introduced in the mini budget were reversed by Sunak’s new Chancellor, Jeremy Hunt, which appeared to restore investors’ confidence and return stability to the bond and gilt markets. However, the impact on both the bond and equity markets, with the FTSE 100 down 3.75% across the period of Liz Truss’ tenure, mean that repercussions were still felt in portfolio performances.
Overall performance of the major indices
Financial markets have experienced high levels of volatility across the year, leading to overall losses for the year-to-date on all the major indices.
In the UK, the FTSE 100 is down 0.04% and the FTSE 250 down over 21.10% for the year to date.
One of the main drivers for the discrepancy in performance between the 100 & 250 indices is lower investor confidence in small/medium companies, as mentioned earlier. Larger companies are more likely to be able to afford increased costs of debt, absorb further tightening of monetary policy and weather any future economic downturns, all of which inspires greater confidence from investors during tough times.
In the US, fortunes have been similar with all three of the major indices down. The Dow Jones has suffered a 9.36% loss, the S&P 500 is down 20.43% and the Nasdaq down 34.91% for 2022 to date.
It has been a tough year for most US market sectors. The table below shows that the energy sector was the only positive performing sector in the S&P 500 over the 12-month period, buoyed by the increase in oil prices driven by the conflict in Ukraine.
| Sector | YTD Performance |
| S&P 500 Energy (Sector) | 58.40% |
| S&P 500 Utilities (Sector) | -0.52% |
| S&P 500 Health Care (Sector) | -3.45% |
| S&P 500 Industrials (Sector) | -6.89% |
| S&P 500 Materials (Sector) | -12.35% |
| S&P 500 Financials (Sector) | -12.89% |
| S&P 500 Real Estate (Sector) | -27.54% |
| S&P 500 Information Technology (Sector) | -27.73% |
| S&P 500 Consumer Discretionary (Sector) | -36.82% |
| S&P 500 Communication Services (Sector) | -40.65% |
Data source: FE Analytics (YTD data run up to the 20th December 2022)
The US has also seen reduced investor confidence in small and medium-sized companies, notably in the technology sector, where access to cheap capital has been key to success in previous years. This is demonstrated in the Nasdaq, which is comprised of technology companies, performing worst of the three major US indices for 2022.
Please note: for this summary, we focus on the major indices within the financial markets such as the FTSE 100 (UK) and the Dow Jones and NASDAQ (US) to provide a factual account of what has happened within a certain index. Performance figures quoted are factual from the year-to-date trading period up to the 28th December 2022 and this summary is for commentary purposes only.
The performance of these indices is not a representation of an individual fund or portfolio. Past performance is no guarantee of future returns. The value of your investment can go down as well as up. You could get back less than you originally invested.