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2022 is ending on a much different note than it started for the equity markets. Anthony Saglimbene, Ameriprise chief market strategist shares his key takeaways from a challenging year, as well as investor considerations for 2023.

Stock prices peaked during the first few days of the year and then spent the rest of 2022 sliding lower, as a bear market took hold across all types of assets. Most notably, the S&P 500 Index is on pace for its worst calendar year of performance since 2008.

Rising interest rates, tighter monetary policies, slowing global growth, heightened geopolitical tensions, and growing recession odds sapped investor sentiment all year and weighed on stock and bond prices.

As a turbulent year for equities and fixed income ends, here are our reflections on the 2022 stock market, as well as key investor considerations for 2023.

1. Recession risks are likely to remain elevated through the first half of 2023.

What happened in 2022: The U.S. economy contracted during the first two quarters, which materially increased concerns that a shallow recession was beginning to form. While the U.S. economy returned to growth in the third quarter, a tight labor market, still-high inflation, and aggressive Fed tightening could act to depress economic activity in the first half of 2023.   

What to consider for 2023: If the U.S. economy does slip into a recession next year, we believe sound consumer and business fundamentals should limit the economic downside.

2. Inflation pressures should steadily moderate through 2023 but remain above Federal Reserve targets.

What happened in 2022: In June, the headline Consumer Price Index (CPI) peaked at +9.1% year-over-year — a four-decade high. As a result, stocks suffered their worst first half of performance in more than 50 years. Through October, headline CPI has moderated lower to +7.7% versus a year ago, but the pace of decline has been stubbornly slow, contributing to slowing U.S. economic growth.

What to consider for 2023: Consumer and producer price inflation should slow as 2023 unfolds. Tougher year-over-year comparisons, more tempered demand (in response to higher interest rates) and easing supply constraints could help curb broader price pressures.

3. The Federal Reserve could pause rate hikes by the end of the first half. However, the Fed could hold its fed funds target rate at a high level through 2023.

What happened in 2022: Through November, the Fed had lifted its fed funds target rate by 375 basis points from essentially zero in March. The sharp move higher in the fed funds rate has been one of the most aggressive rate hikes in decades, with most investors expecting the Fed will continue to lift rates higher into next year.

What to consider for 2023 We expect U.S. monetary policy to tighten modestly in the front part of next year. Fed officials then may choose to pause rate hikes and allow the economy time to absorb the more restrictive policies to help bring down inflation. As such, investors should consider an investing environment where rates linger at higher levels for longer compared to previous tightening cycles.

4. Corporate profit growth should continue to slow and possibly turn negative.

What happened in 2022: Earnings growth substantially slowed from unsustainably high levels in 2021 amid soaring inflation, disrupted supply chains, a tight labor market, and cooling demand.  A shift in consumer spending from goods to services and slowing discretionary spending, given high food and energy prices, also weighed on corporate profits.

What to consider for 2023: Although earnings estimates for 2023 have come down, we believe they remain elevated given the interest rate, inflation, and growth environment. Should demand cool in 2023, companies may see more pressure on profit margins and a reduced ability to pass on costs. Investors should focus on companies with more predictable earnings trends, stable demand, and an ability to grow under various economic conditions (including a recession).  

5. All bear markets have one key dynamic in common — they eventually end.

What happened in 2022: Rising interest rates and lower asset prices (in response to high inflation) were the principal themes driving the pressure in market performance this year. Overseas, restrictive zero-COVID-19 policies in China, the Ukraine war, an energy crisis in Europe, a strong U.S. dollar, and tightening monetary policies in response to disruptive inflation pressures also weighed on global asset prices. Moreover, manufacturing and services activity across several parts of the developing and developed world contracted.

What to consider for 2023: Despite the potential for further headwinds, the market is always looking into the future. Stock and bond prices may begin to recover before it is clear the global economy is back on a more sustainable growth trend.

6. Prepare portfolios to weather more volatility but think longer-term when others may be overly focused on the near term.

What happened in 2022: With the exception of energy and commodities, there were few areas where investors could turn to weather declines. On a relative basis, U.S. assets, including the dollar, helped provide investors with a port in the storm. Additionally, high-quality value stocks/bonds, income-producing investments, and alternatives also helped investors ride out a challenging year.

What to consider for 2023: Investors should continue to lean into areas that reduce portfolio risk, including high-quality stocks/bonds, income-producing investments, and alternative strategies. However, there may be a point next year at which investors may want to shift into a more offensive approach. Staying disciplined, avoiding timing mistakes, and making modest tactical adjustments when conditions warrant are strategies that could help investors respond to the shifts in growth/policy we are likely to see throughout the year.

Start 2023 off on a strong note — with financial advisor, Peter Weinbaum.
770-497-5755 Peter.Weinbaum@ampf.com

If you have questions about your personalized investment portfolio, schedule a review with your Ameriprise financial advisor. The beginning of the year is an excellent time to reevaluate your financial goals and risk tolerance and make any necessary adjustments.