There was no year-end rally. US stocks closed lower ahead of the New Year's celebrations. Recession fears weighed on growth stocks, adding to the bleak mood. The S&P 500 extended its losing streak to four weeks (-0.20% week-over-week), finishing the year with a decline of 19.44% - its worst drawdown since the Lehman collapse in 2008. The tech-heavy Nasdaq composite racked up even bigger losses, sinking 33.10% in 2022 (down 0.30% for the week). Indeed, tech stocks led the broader market slump, hit by rising bond yields (10-year Treasury yield up 237 basis points over the last 12 months) as the Fed recalibrated its monetary policy to fight inflation. As an illustration, shares of Apple Inc. (APPL) slumped 26.83%, wiping out more than $800bn in market cap. Despite this drop, the tech giant remains the world's most valuable company by market cap. The Dow Jones Industrial Average posted an 8.78% loss for 2022, outperforming the S&P 500 benchmark by double digits. It’s worth noting that four companies whose stocks are in the S&P 500 but not in the Dow — Amazon (AMZN), Meta Platforms (META), Alphabet-Google (GOOG) and Tesla (TSLA) — accounted for more than half of this excess return.
European indexes also wrapped up a nightmare year after Russia's full-scale invasion of Ukraine and sharp reductions in natural gas supplies to Europe, hence the ECB hawkish stance amid red-hot inflation. The MSCI EMU plunged 14.53% accordingly. By contrast, the FTSE 100 ended the year with slim gains (+0.91%) despite global turmoil. The flagship index was helped by a sharp rise in share prices of energy companies and miners. This is one of the very few major indexes to achieve a rise this year.
In Asia, Chinese stocks fell hard too, pressured by regulatory fines, monthslong campaigns against technology companies and new Covid lockdowns. The Shanghai Composite lost 15.13% over the year. Japan’s Nikkei shed 9.37%, dragged lower in December by the Bank of Japan that put an end to its super-easy monetary policy. In India, the NIFTY 50 index bucked the trend with an annual gain of 4.33% as supply chain disruptions caused by Beijing’s zero-Covid policies boosted the country’s appeal to multinationals.
Energy remains the safe haven
Energy was the only S&P sector in the green for 2022, up 59.04% against the backdrop of geopolitical tensions and supply threats. Yet WTI oil prices were barely higher on the year (up 6.71%), as the outlook for oil demand continued to deteriorate during the last quarter amid rising recession fears. The same was true for natural gas prices that fell to levels last recorded in February, just before the Russia-Ukraine war, as warmer weather helped Europe to preserve its reserves.
Far behind energy, defensive sectors showed resilience after the Fed gave a clear indication of a rigorous interest rate hike and tighter monetary control. These sectors have always been a go-to place for investors during extreme market fluctuations. Utilities, consumer staples and health care weathered the storm with modest losses of 1.44%, 3.17% and 3.55% respectively.
On the flip side, growth stocks got hammered particularly hard as those assets look less enticing in a world in which interest rates are going up and people are facing higher borrowing costs. Thus, communication services stocks declined by 40.42% in 2022. Looking at the holdings of this group, it comes as no surprise that it was the worst performer among the S&P sectors. The top three holdings are Meta Platforms (META), formerly Facebook, and the two share classes of Alphabet (GOOG - GOOGL), the parent company of Google. After delivering outstanding returns from 2019 to 2021, those giants took a nosedive this year, down 64.22% and 38.67% respectively. META’s collapse was largely publicized as the company has been struggling with several challenges, including the debate on what the metaverse actually is, that have spooked investors. Investor sentiment towards Alphabet-Google also turned sharply negative after the internet giant reported lower-than-expected profit and revenue.
Consumer Discretionary (-37.58%) was the second worst performing sector of the S&P 500 in 2022. When times are tough, consumers are reluctant to spend on goods that are deemed as less necessary as evidenced by the Amazon stocks’ rout (AMZN, down 49.62%). The e-commerce giant warned of weaker consumer spending and missed Wall Street expectations. The sector was also weighed by Tesla shares’ free fall (down 65.03%) amid Elon Musk’s Twitter takeover and related distractions, as well as investors’ worries that red-hot inflation and rising interest rates will dampen demand for EVs.
Tech stocks also plummeted (information technology down 28.91%), hit by inflation, higher interest rates, and a stronger greenback. Microsoft (MSFT) plunged 28.69% in the wake of weak revenue growth, throttled by rising energy costs and a slump in Windows sales.
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Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
