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A Weak Trading Day To End A Bad Year

U.S. stocks closed lower on the last trading day of 2022. It marked the worst performance for U.S. equity markets since the financial crisis in 2008 with the S&P down 20%, the Nasdaq losing 33% of its value and the Dow shedding 9%. 

The selling on the last day added salt to the wounds with the S&P closing ed down 0.25%, the Nasdaq down 0.11%, and the Dow down 0.22%. 

This was a marked contrast to the years we had in 2020 and 2021 where the market soared from new highs to new highs. 

Granted, volumes were affected by holiday trading, but the result was still the same, a weak day to end a bad year. 

Here are the closing levels on Friday, 30th December 2022:

 Last Change %Change 
Dow Jones 33,147.25 -73.55. -0.22% 
S&P 500 3,839.50 -9.78 -0.25% 
Nasdaq Comp 10,466.48. -11.61. -0.11% 
US 10Y 3.87%   
VIX      21.67 +0.23 +1.07% 

At the beginning of last year, I warned about inflation, covid, and the potential of a war in Ukraine. 

It turned out that covid became less of a concern as the year went on but inflation and the war were front and center. 

These were the 2 main factors that drove 2022 to one of the worst years in a long time. The hope is that we have seen the worst and it’s time to look forward to a better year. 

Inflation is still not fully under control, and we expect the Fed to hike another 25 basis points over the next 3 meetings and hold after that. No pivot is in the cards for 2023 as it stands now. 

On the other hand, the war is heading for its second year and the effects are still being felt around the world. 

To add, the Covid-19 zero policy being lifted by China is supposed to be a good thing but there are still risks, with the high number of infections in China which could affect productivity and spending. 

Nevertheless, the pain felt last year could mean that we are getting ready to put the past behind us and start looking forward to the markets stabilizing and maybe bouncing back up. 

Considering the level at which the Feds has raised rates and the fact that bonds yield had gone up from 1.51% to 3.87% in a year, it is a surprise we did not see a bigger selloff in markets. 

Could this mean that the market is strong enough to handle higher for longer rates? 
Or are investors too stubborn to see the truth? 

Are markets sufficiently priced for a likely recession or are they looking ahead to what comes after the recession? Hopefully, 2023 will not be as volatile as last. 

I wish you and your families all the best for 2023. Happy New Year!  

Source: CBOE, Bloomberg

This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.

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