Saying Goodbye to 2022 with 12 Charts

January 20, 2023 Kevin Gordon
Significant market disruptions in 2022 underscored important lessons for investors, not least being the principles of diversification, patience, and resilience.

While the start of a new year typically warrants a detailed look at what's to come, an evaluation of 2022 seems just as beneficial—not least because it was a year in which markets faced disruptions from every angle. While the following charts don't necessarily tell us what 2023 has in store, I think they serve as important reminders that portfolios can be quite resilient when investors are willing to stick to disciplined methods of investing, despite threats that can seem epic at the time.

Source: Schwab Center for Financial Research

January: Throwing darts

It is customary at the start of a new year for some Wall Street strategists to publish their year-end targets for the S&P 500® index. You won't find us in that camp of forecasters; we have no idea where the market will close on any given day, let alone 365 days from now. Heading into 2022, the average year-end target for the S&P 500 among Wall Street strategists surveyed by Bloomberg was 4,982. Not only did the index never reach that level—it in fact peaked on the first trading day of the year—it ended the year 23% below it.

So (not very) close

Chart shows the performance of the S&P 500 in 2022. The index never reached the average of Wall Street strategists' year-end 2022 target of 4,982.

Source: Charles Schwab, Bloomberg, as of 12/30/2022.

*Average forecast compiled by Bloomberg's survey of Wall Street strategists. Past performance is no guarantee of future results.

The reason it's worth pointing out the futility of year-end S&P 500 price targets is because there are always myriad unknowns that can adversely affect stocks. Who could have accurately predicted the combination of Russia's invasion of Ukraine, one of the most aggressive Federal Reserve tightening cycles in history, inflation's return to a 40-year high, and a breakdown of mega-cap tech leadership altogether?

February: A rupture of epic proportions

While the world was continuing to celebrate its emergence from the depths of the pandemic—roughly two years after things got ugly—Russia decided to launch an unprovoked and dramatic attack on Ukraine. By the end of February, Russian troops descended on their neighbors to the east, sending the globe into utter shock. As expected, that accelerated losses for stocks around the world and sent commodity prices soaring—the latter due to both countries' importance in supplying the world with oil and food. As you can see in the chart below, the price of Brent crude oil rose sharply after the invasion; at the peak, it was up by nearly 70% year-to-date. Perhaps more interesting, though, was the decline thereafter. For all the hysteria over a "new era" of sky-high oil prices, Brent ended the year up by only 10%.

The real loser, however, was the Russian stock market. You can see that the value of the MOEX Index of Russian equities was essentially cut in half right as Russia invaded Ukraine. Despite a brief trading hiatus, the index barely recovered any of its losses, closing down by more than 40% on the year.

Cold reception

Chart shows the MOEX Russia Index compared with the S&P 500 and Brent crude oil price per barrel from June 2021 through the end of 2022. Stocks sold off dramatically and Brent crude oil spiked after Russia invaded Ukraine in February 2022.

Source: Charles Schwab, Bloomberg, as of 12/30/2022.

Data indexed to 100 at 12/31/2021. Dotted line represents 12/31/2021. Russian stock market data largely unchanged from end of February through March given the market's closure during that time. Past performance is no guarantee of future results.

March: Code Fed

There was likely nothing more important for markets and the economy in March than the start of the Federal Reserve's interest-rate-hiking campaign. What no one knew at the time was that the mere 25-basis-point increase in the federal funds rate that month would be followed by a series of 50- and 75-basis-point hikes throughout the remainder of the year. As you can see in the chart below, the Fed took rates up at a dramatic pace, making the current tightening cycle one of the most aggressive in history.

Fed gets aggressive

Chart shows the pace of Federal Reserve rate hikes from 1955 through 2022, combined with shaded bars showing recessions and colored bars showing soft landings. The Fed's latest rate-hike cycle began in March, and has been one of the most aggressive monetary policy tightening cycles in history.]

Source: Charles Schwab, Bloomberg, as of 12/31/2022.

Fed funds rate uses effective rate from 1955-1971 and target rate upper bound from 1971-present. Soft landings defined as periods when the economy stops growing but doesn't enter recession. A basis point is one-hundredth of a percentage point, or 0.01%, so 50 basis points (bps) equals 0.5% and 75 bps equals 0.75%.

At first glance, the chart shows that the Fed's track record in successfully engineering soft landings is suboptimal at best. Since the mid-1950s, there have been 10 recessions and three soft landings following rate-hiking cycles. For what it's worth, we're not in the soft-landing camp.

April: Anyone home?

The labor market garnered much attention last year for many reasons, but the most important one arguably should have been the divergence between (the establishment survey's) nonfarm payrolls and the household survey's measure of jobs. As shown in the chart below, April 2022 was the first month since January 2021 in which both the establishment and household surveys diverged from each other. The difference, however, was that January 2021 ended up being an outlier. The April decline in household employment preceded a much weaker stretch of months—indeed, through the end of the year, nonfarm payrolls increased by nearly 2.9 million while the household survey increased by 920,000 (thanks largely to the 717,000-job spike in December, essentially all of which were part-time jobs).

Household vs. the establishment

Chart shows the monthly change, in millions, for nonfarm payrolls and the household survey going back to January 2021. From April through the end of 2022, nonfarm payrolls increased by nearly 2.9 million while the household survey increased by 920,000, driven largely by a 717,000 spike in December.

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 12/31/2022.

As we have mentioned many times for the past few months, it's important to pay attention to these divergences when you get to a potential inflection point in the economic cycle. If the household survey's weakness last year is to be believed—and consistent with prior peaks in the labor market—the road ahead for payrolls will be a lot less smooth than it was last year.

May: No retail fairytale

Some charts speak for themselves. That was unfortunately the case for big-box retailers and their stock prices in May. After consumers' over-ordering during the pandemic and an epic crisis for the global supply chain, large retailers eventually found themselves with a massive inventory glut. For those in the chart below, tens of billions of dollars' worth of inventory accumulation signaled an ominous profit outlook, given the prospect of marking down prices to clear stockpiles. That nearly chopped Target's year-to-date performance in half and also hit Walmart and Costco hard. However, it didn't shake out evenly for these three by the end of the year, given Walmart essentially recovered its loss, Costco was down by 20%, and Target finished lower by more than 30%.

Retail's tail between its legs

Major retailers got hit hard in May given a surge in inventories, but their recovery was not even.

Source: Charles Schwab, Bloomberg, as of 12/30/2022.

Data indexed to 100 at 12/31/2021. Past performance is no guarantee of future results. All corporate names are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

June: Cryptonite

There were so many defining moments for cryptocurrencies last year, but one that took the cake was essentially the entire month of June—during which Bitcoin saw its worst-ever monthly drop (-41%), and "stablecoins" like TerraUSD collapsed, bringing down major crypto institutions. Celsius, Voyager, and Three Arrows Capital were among the largest to fall, and FTX (yes, it appears later in this report) was called to the rescue to help other firms such as BlockFi. It isn't a stretch to say that the total meltdown across the crypto universe further cemented doubt around the viability of the industry. Yet again, as shown in the chart below, Bitcoin found itself deep in negative return territory to close out the year, down by 65%.

Rolling in the deep

Chart shows Bitcoin's rolling 52-week percentage change between 2016 and the end of 2022. It has been highly volatile and ended 2022 in negative territory.

Source: Charles Schwab, Bloomberg, as of 1/1/2023.

Y-axis is truncated for visual purposes (max value was 2,310% in December 2017). Past performance is no guarantee of future results.

July: In a word: recession. In two words: no recession.

Ah, the recession definition debate. We found ourselves mired in it last year when U.S. gross domestic product (GDP) declined for two consecutive quarters, which was confirmed in July's release of second-quarter GDP data. First, to be clear, a U.S. recession is not defined as two consecutive quarters of negative growth. The National Bureau of Economic Research (NBER) is the official arbiter of recessions. The definition is as follows: "…a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The committee's view is that while each of the three criteria—depth, diffusion, and duration—needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another."

The committee assesses the health of four key indicators—industrial production, real personal income (ex-government transfers), payrolls, and business sales—to determine the state of the business cycle. Notice that GDP shows up nowhere in the official definition.

Nonetheless, it's still helpful to visually put the two-quarter argument to bed. The chart below shows every quarter in which U.S. GDP contracted, going back to the 1940s. The two exceptions are in 1960 and 2001, which are purposely circled and highlighted in red to show that, in those recessions, we didn't see two consecutive quarterly drops in GDP. Conversely, in 1947 and 2022, we did in fact see two consecutive declines, but the economy wasn't declared as in a recession. In fairness, the NBER could come out tomorrow and announce a recession started early last year, but the data argue strongly against that.

It's not what it looks like

Chart shows the quarters with negative real GDP growth, as annualized quarter-over-quarter change, since 1947. There are instances (like 1960 and 2001) in which recessions have not included two consecutive quarterly declines in GDP. Conversely, in 1947 and 2022, we did in fact see two consecutive declines, but the economy wasn't in a recession.

Source: Charles Schwab, Bloomberg, as of 9/30/2022.

Grey-shaded areas indicate periods of recession. Yellow circles show periods where there were two consecutive quarters of negative GDP but the economy was not in recession. Red circles show periods when the economy was in recession, but there were not two consecutive quarters of negative GDP. Y-axis is truncated for visual purposes.

August: Back to same-day delivery

If there is a list of controversial inflation charts, this next one likely is at or near the top. Back when the Fed was using the word "transitory" when describing the nature of inflation and how it arrived on our shores, shipping rates were obsessed over for multiple reasons. Given the near-universal lockdown of the global economy due to the pandemic, services were mostly unavailable, forcing consumers to shift most, if not all, of their buying power to goods. That spike in demand weighed heavily on the ability to ship enough goods over in a timely fashion, thus pushing freight prices up exponentially.

Yet, that didn't last too long. By August, the cost of shipping a 40-foot container from Shanghai to Los Angeles was cut in half from the peak, as shown in the chart below. Prices fell further from there, essentially erasing nearly all pandemic gains. Yes, many shipping contracts are still locked in at higher rates, but it's quite telling that the relentless decline in freight prices has not yet been arrested.

Dare to say it: transitory

Chart shows the cost to ship a 40-foot container from Shanghai to Los Angeles going back to 2012. The price spiked above $12,000 during the COVID pandemic, but by August 2022 it was cut in half from the peak.

Source: Charles Schwab, Bloomberg, as of 12/22/2022.

September: A dollar is all I need

It's probably safe to say that nothing captured more coverage in September than the British pound's plunge, which happened alongside a spike in British yields and near-collapse of the pension system in the United Kingdom. You can see in the chart below that September marked the worst point (year-to-date) for the pound relative to the U.S. dollar (a reminder that these series are measuring the dollar’s performance relative to each currency, so a move higher indicates weakness for the yen, euro, and pound). It depreciated by 26%, catching down to the Japanese yen's dismal devaluation.

Do you remember

Chart shows the performance of the U.S. dollar versus the Japanese yen, euro and British pound going back to September 2021.

Source: Charles Schwab, Bloomberg, as of 12/30/2022.

Data indexed to 100 (base value = 12/31/2021). Black dotted line indicates 12/31/2021, which is the date to which data are indexed. Past performance is no guarantee of future results.

As is typically the case with price driving sentiment, many prognostications for the Japanese and British markets at the time were quite apocalyptic. Yet, the pain didn't last much longer for either currency, as both reversed their losses heading into the end of the year. In fact, the pound completely erased its drop seen during the fiscal crisis that originally opened the trap door beneath it.

October: Recession debate comes back

Do good things come in pairs? Not if you're talking about the inversion of both the 10-year/3-month and 10-year/2-year Treasury yield curves. As shown in the chart below, October saw the former join the latter in falling below 0%, meaning the 3-month Treasury yield climbed above the 10-year yield. That sparked a ton of recession chatter, which is understandable given both curves' inversions have historically been among the most consistent precursors to recessions.

Another curveball

Chart shows the 10-year/3-month Treasury yield curve spread and the 10-year/2-year Treasury yield curve spread. The 10-year/3-month Treasury yield curve fell below zero in October, meaning the 3-month Treasury yield climbed above the 10-year yield.

Source: Charles Schwab, Bloomberg, as of 12/30/2022.

Black dotted line indicates point at which both yield curve spreads dipped into negative territory. Past performance is no guarantee of future results

Investors should know that, when looking back at history, there is a ton of variability around the average time it takes to go from inversion to recession. What's more important to keep in mind is that the market is standing firm in its view that the Fed is likely going to overdo it, thus sparking an economic downturn.

November: A token of no one's appreciation

Crypto contagion came back in November, and it wasn't good. This time, it was FTX—yes, the institution that was "saving" others in the June crisis period—that sparked another disaster in crypto land. Its own token—FTT—saw a dramatic selloff in November, eventually collapsing in value to next to nothing, as shown in the chart below. That ushered in the demise of the entire firm, a criminal investigation into its founder(s), and the vanishing of billions of dollars in assets.

FTT is N/A

FTX's FTT token collapsed in November, erasing nearly all of its value.]

Source: Charles Schwab, Bloomberg, as of 12/6/2022.

FTX filed for bankruptcy on 11/11/2022 and Bloomberg's vetted pricing providers are no longer consistently providing prices on the FTX Token. The FTT Token is the native token of FTX and allows holders to receive discounts on trading fees as well as other benefits. Red line represents the month of November 2022. Past performance is no guarantee of future results.

December: Santa skipped Wall Street

Before I cause any confusion on the definition of a "Santa Claus rally," which is when the S&P 500 rallies in the last five trading sessions of a year and the first two of the next year, I will confirm that we did in fact see one (+0.8% in that timeframe). However, if we broaden our view to the entire holiday season, which is longer than seven trading days, it's clear that stocks didn't catch a jolly bid heading into the end of the year. As shown in the chart below, all major indexes fell in December, with the Nasdaq leading to the downside (-8.7%).

A December we don't need to remember

Chart shows the 2022 performance for the S&P 500, Nasdaq, Russell 2000 and Dow Jones Industrial Average. While there was a technical "Santa Claus rally," major U.S. stock indexes declined in December.

Source: Charles Schwab, Bloomberg, as of 12/30/2022.

Past performance is no guarantee of future results.

In sum

Mired in geopolitical, market, and inflation crises, investors were forced to navigate an unnerving amount of volatility in 2022. Yet, if anything, last year proves that in the face of serious pain across multiple asset classes, sticking to disciplines around diversification and rebalancing yields what is needed most in these times: confidence and some degree of calm. As my colleagues and I have noted in our outlooks for this year, there likely are brighter days ahead. They may not arrive imminently, but it's worth taking comfort in the fact that clouds are starting to dissipate.

Get Schwab's view on markets and economy.

Schwab Market Update: Stocks Fall Amid Mixed Earnings

U.S. equities finished near their lows of the day as the markets continued to digest mixed earnings data and last night's State of the Union Address from President Joe Biden.

Stocks Fall Amid Mixed Earnings

U.S. equities finished near their lows of the day as the markets continued to digest mixed earnings data and last night's State of the Union Address from President Joe Biden.

Looking to the Futures: Aussie Higher Following Hawkish RBA

The Reserve Bank of Australia (RBA) was next-up with its interest rate announcement and as expected, hiked the Official Cash Rate (OCR) by 25 basis points to 3.35% on Tuesday.

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