International markets ended 2022 on a softer note with most international indices ending December lower, although still providing a positive fourth quarter return to cap a volatile year. The volatility was dominated by a combination of issues, being: (a) the aggressive hiking of interest rates by the various central banks to curb runaway inflation as well as recessionary fears, (b) the Russian invasion of Ukraine, which has impacted energy and food costs, as well as (c) the continuing spectre of the Covid-19 pandemic and the resurgence of cases in China, as that country was in the process of reopening its borders and reducing very strict pandemic controls.
The market indices all trended softer as the markets recorded their worst annual performance since 2008, with the S&P 500 recording a decline of 6% for the month of December and 19.4% for the year. Similar weakness impacted the Dow, which was down by 4.2% for the month and almost 9% for the year. The Nasdaq was down by over 8.5% for the month and being the worst annual performer, dropping by over 33% for the year.
On the US economic front, inflation data for November showed a slowdown for the second consecutive month, with CPI data coming in at 7.1% YoY, vs. the October reading of 7.8% YoY, being the lowest reading in almost eleven months. Core CPI, which excludes energy and food, came in lower at 6.1% YoY, vs the October reading of 6.3% YoY.
The Federal Reserve hiked rates for the fifth time in a row, this time by 0.5%, breaking the four cycles of 0.75% increases, thus raising the US interest rate to its highest level in almost 15 years. Rhetoric out of the Fed all points to increased negativity regarding labour and economic activity for 2023 and leading to the expectation of rates in the US continuing to be higher through 2023.
European markets followed the trend set by the US, with the major indices all weaker. The FTSE – 100 closed the month lower by 1.6% and eked out an annual gain for 2022 of 0.9% – one of the few markets to do so. Inflation also slowed in November, coming in at 10.7% YoY, vs the 41-year high of 11.1% in October, as fuel prices softened, which eased some of the pressure. Food and energy prices continued to be high, however, and are major components of the stubborn inflation trend. As with the continuous fight against inflation, and in keeping with its US counterpart, the Bank of England (BoE) raised rates by 0.50%, to 3.50%, the eighth increase for the year.
Similarly, both the Dax and Cac ended the month weaker by 3.3%, and 3.9% respectively and unlike their UK counterpart, ended the year weaker by 12.3% and 9.5% respectively.
In keeping with the trend set by the Fed and the BoE, the European Central Bank (ECB) raised rates by 0.5%, vs the 0.75% in both September and October, taking key rates to 2%, and reiterating the reduction in its balance sheet by EUR15bn per month until the end of 2023.
Asian markets had a mixed month, with the Hang Seng closing December stronger by 6.4%, while the Shanghai composite index ended the period lower by 2%. On an annual basis both indices ended the year lower by over 15%.
Staying in China, on the economic front, concerns were raised regarding potential shortages in the labour force and further disruptions to supply as a new outbreak of Covid occurred in December. The official manufacturing PMI fell to 47.0 in December, from the 48.0 reading in November – the biggest decline since February 2020. The official non-manufacturing PMI number for December measuring business sentiment, fell to 41.6 for December vs. the 46.7 reading of November. The 50.0-point mark separates expansion from contraction, with a reading above 50 indicating expansion and one below 50 indicating contraction.
Japan experienced a similarly weak month, with the Nikkei coming in lower by 6.7%, and 9.4% for the year. Data points to a smaller contraction in the third quarter of 2022 as GDP numbers came in at 0.8% vs. an expected 1.2%.