Wall Street ended a quiet trading day with several losses on Friday as it closed the book on the worst year for the S&P 500 since 2008.
The benchmark ended with a 19.4% loss for 2022 — the worst loss since the financial crisis 14 years ago and a painful turnaround for investors after the S&P 500 posted a nearly 27% gain in 2021.
The Nasdaq composite suffered even greater losses, falling 33.1%. The index underperformed much because it is heavily composed of technology stocks, which led to the broader market decline.
The Dow Jones Industrial Average, meanwhile, posted an 8.8% loss for 2022.
Stocks struggled throughout the year as inflation put increasing pressure on consumers and fueled concerns that economies were slipping into recession. Central banks raised interest rates to combat high prices. The Federal Reserve’s aggressive rate hikes remain a major focus for investors as the central bank walks a fine line between raising interest rates enough to cool inflation but not so much as to stall the US economy into recession.
The Fed’s key lending rate was in a range of 0% to 0.25% at the start of 2022 and will close the year in a range of 4.25% to 4.5% after seven increases. The US Federal Reserve predicts it will reach a range of 5% to 5.25% by the end of 2023. Its forecast does not call for a rate cut before 2024.
Russia’s invasion of Ukraine exacerbated inflationary pressures earlier this year by making oil, gas and food prices even more volatile amid existing supply chain problems. China spent most of the year imposing strict COVID-19 policies that squeezed production for raw materials and goods, but is now easing travel and other restrictions.
However, the Fed’s fight against inflation is likely to remain the overriding concern in 2023, according to analysts. Investors will continue to look for a better sense of whether inflation is slowing fast enough to take pressure off consumers and the Fed.
If inflation continues to show signs of slowing and the Fed reins in its rate hike campaign, it could pave the way for a recovery in stocks in 2023, said Jay Hatfield, managing director of Infrastructure Capital Advisors.
“The Fed has been overhanging this market, really since last November, so if the Fed pauses and we don’t have a major recession, we think that sets us up for a rally,” he said.
There was little corporate or economic news for Wall Street to review on Friday. That, plus the shortened holiday week, set the stage for mostly light trading.
The S&P 500 fell 9.78 points, or 0.3%, to end at 3,839.50. The index showed a loss of 5.9% for the month of December.
The Dow fell 73.55 points, or 0.2%, to close at 33,147.25. The Nasdaq fell 11.61 points, or 0.1%, to 10,466.48.
Tesla rose 1.1% as it continued to stabilize after steep losses earlier in the week. The electric car maker’s stock fell 65% in 2022, its worst year ever.
Southwest Airlines rose 0.9% as its operations returned to relative normality after massive cancellations over the holiday period. The stock still ended up 6.7% for the week.
Energy stocks outperformed the rest of the market as US crude oil prices edged 2.4% higher. The sector gained 59% for the year, while the other 10 sectors in the S&P 500 ended 2022 in the red.
Small company stocks also fell on Friday. The Russell 2000 lost 5 points, or 0.3%, to close at 1,761.25.
Bond yields mostly rose. The yield on the 10-year Treasury note, which affects mortgage rates, rose to 3.88% from 3.82% late Thursday.
Several major labor market updates are on tap in the first week of 2023. It has been a particularly strong area of the economy and has helped create a bulwark against a recession. However, that has made the Fed’s job more difficult because strong employment and wages mean it may need to remain aggressive to keep fighting inflation. This, in turn, increases the risk of slowing down the economy too much and causing a recession.
The Fed will release minutes from its latest policy meeting on Wednesday, potentially giving investors more insight into its next move.
The government will also publish its November report on job openings on Wednesday. It will be followed by a weekly unemployment update on Thursday. The closely watched monthly employment report is due out on Friday.
Wall Street is also awaiting the latest round of corporate earnings reports, which will start pouring in around mid-January. Companies have warned investors that inflation is likely to squeeze their profits and revenues in 2023. That’s after spending most of 2022 raising prices on everything from food to clothes in an attempt to offset inflation, even as many companies went longer and actually padded their profit margins.
Companies in the S&P 500 are generally expected to report a 3.5% decline in earnings during the fourth quarter, according to FactSet. Analysts expect earnings to then remain broadly flat through the first half of 2023.
The US stock markets will be closed on Monday for New Year’s Day.
