December Market Commentary

Market Commentary

US stocks fell in December to end a positive quarter, but disappointing year, as investors focused on a potential recession and how severe it could be. US equity markets experienced their worst year since the financial crisis driven by decades high inflation and aggressive Fed rate hikes throughout the year. Economic news was mixed over the month. The U.S. labor market remained historically tight with employers adding 263,000 jobs in November, well above the 200,000 estimate. The unemployment rate in November was unchanged at 3.7%. Inflation data showed signs of easing with PPI, CPI and PCE all lower than October and well below their recent peaks. The producer-price index increased by 7.4% annually in November, down from 8% in October. CPI increased by 7.1% annually in November, down sharply from 7.7% in October and the 9.1% peak in June. Core CPI, which excludes food and energy, rose by 6% annually in November slightly below the 6.1% estimate. The personal consumption expenditures index, the inflation gauge the Fed prefers, was up 5.5% annually in November, matching expectations and down from the 6.1% increase reported for October. US retail sales fell 0.6% in November from the prior month for the biggest decline of the year. U.S. existing-home sales declined for a 10th straight month falling 7.7% in November. It extended a record streak of declines as high mortgage rates and home prices kept many buyers out of the market.

Foreign stocks were relatively flat in December, but ended the fourth quarter significantly higher as inflation remained near record levels and China reopened from Covid restrictions. Foreign stocks outpaced US stocks over December, the fourth quarter, and 2022. Gains were also driven by the US dollar falling by over 7.5% in the fourth quarter. The Eurozone’s headline inflation rate fell in November, for the first time since mid-2021, to 10% from 10.6% in October. The U.K.’s annual inflation rate fell more than expected in November to 10.7% after it hit a 41-year high in October. The European Central Bank, the Bank of England, and the Swiss National Bank all increased their benchmark interest rates by 0.5% to combat the high levels of inflation. The Bank of Japan made a surprise decision to let the yield on the 10-year Japanese government bond rise as high as 0.5% from a previous cap of 0.25%. The Bank of Japan had set a target range near zero since 2016 to keep overall market interest rates low. Oil prices were flat in December, ending the month at $80.26 per barrel, but gained 7% for the year. Emerging markets trailed developed markets over December, the fourth quarter, and 2022.

Interest rates increased in December as investors focused on Fed officials’ comments that they believed they needed to maintain higher rates for longer. The yield on the 10-year Treasury increased in December, ending at 3.83% up from 3.70% at the end of November, but jumping significantly from 1.50% to start the year. At its December meeting the Fed increased the fed funds rate by 0.5% to a range of 4.25%-4.50%, and signaled plans to lift rates in smaller increments through the spring to combat high inflation.  Fed Chair Powell said that slowing rate rises to more traditional quarter-percentage-point increments as soon as the Fed’s next meeting would provide the best way to manage the risk of over-tightening. The rate for a 30-year fixed-rate mortgage was unchanged remaining at 6.5% to end December. Municipal bonds were the top performer for December and the fourth quarter, while US Agency bonds were the top performer for 2022. Shorter-term bonds outpaced longer-term bonds for December and for 2022, while longer-term bonds outpaced shorter-term bonds for the fourth quarter.