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The Month In Markets – December 2022

Investors hoping for a Santa Rally this December were left disappointed. However, after a strong October and November global equities did still post a positive final quarter. The year in itself will be remembered as an extremely challenging period, with weakness in both equities AND bond markets.

The Santa Rally – the so-called phenomenon of equity markets performing well in December does actually have some supporting evidence. Analysis of monthly returns dating back to 1926 (for US stocks) showed that the month of December had the highest probability of producing positive returns. For those interested, September was the month with the lowest probability of positive returns (although this was still above 50%).

As the chart above shows, equity markets across the globe trended downwards in December, with the US market being the worst performer. Unpacking what happened, it seemed the US Fed were once again the main drivers of markets.

US inflation data, which was released mid-month, carried on the very recent trend of slowing at a faster pace than the market anticipated. US CPI for November (released in December) showed year-on-year inflation at 7.1%, lower than the expected 7.3% and the previous reading of 7.7%. A month earlier, US equity markets rose around 5% in one day on similar inflation data, however, this month there was no equivalent response. Coupled with lower inflation was a reduction in the size of interest rate hikes from the US Fed, who raised rates by 0.5%, as opposed to the recent 0.75% hikes. It’s fair to say that many investors would have expected lower inflation and smaller interest rate hikes to be positive for equities. However, it was US Fed Chair Powell’s speech that spooked markets and poured cold water on the Santa Rally. He stated that he did not believe that policy was yet restrictive enough (therefore meaning further interest rate hikes would occur) and that the central bank would need to be very confident that inflation was on the right path before considering any interest rate cuts. Importantly, the projections from the US Fed for where policy will be in 2023 showed they didn’t expect to cut interest rates this year. For investors who had positioned for a ‘Fed Pivot’ this hawkish language was bad news and we witnessed both bonds and equities sell-off.

Moving to China, we saw the country begin to ease controls and strict lockdown measures at the start of the month. Officially, the Chinese leadership team stated that the Covid-19 variants were becoming weaker and therefore it was safe to remove certain restrictions. However, after recent widespread protests there is a view that Xi Jinping was forced to change his stance given the level of these civil uprisings. While China re-opening should be good for economic growth, there are lingering concerns that a spike in cases could lead to further COVID variants and pose a global risk once more. Leaked reports from the country showed that they estimated 250 million people had caught COVID in the first 20 days of December. Many countries including the US have since implemented a China covid rule, ensuring travelers undertake mandatory testing before arrival.

There were interesting moves in the energy markets in December. The crude oil price dipped below $75 a barrel and was lower than it was during the start of the year (before Russia invaded Ukraine). The regular drivers amongst the readers will have noticed falling prices at the pumps – the writer can now find unleaded petrol below £1.40 a litre! The falling petrol prices should help the consumer, while it will also act as a deflationary force in upcoming inflationary data this quarter. European natural gas prices were extremely volatile during the month. With a cold snap initially sweeping across Europe we saw a spike in natural gas prices as consumption picked up and concerns mounted regarding suitable storage levels. However, the cold snap was immediately followed by a period of much more mild weather throughout Europe, and this led to a sharp reversal in natural gas prices. So far it seems the concerns of Europe running out of gas have been overdone and storage levels are at seasonal highs currently (88% full). Lower energy prices across Europe will have a positive impact on both consumers and businesses as we head into 2023.

As we look ahead into 2023 and beyond there is early evidence of inflation peaking and indeed beginning to trend down and this is likely to be a positive for asset prices. We believe it is unlikely that interest rate policy across most developed markets will be as aggressive in 2023 as it was this year, with the inflation shock now largely behind us and heavily priced in to assets. That being said, interest rates, at current levels will still pose headwinds for consumers and the housing market and as such we have held off increasing risk in portfolios, despite a better inflation outlook and much lower asset valuations. While diversification was hard to come by in 2022, with equities and bonds both falling, we believe correlations will begin to normalise going forward, however it is also important to hold additional asset classes for diversification, such as gold and infrastructure.

Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Andy Triggs

Head of Investments, Raymond James, Barbican

Our latest Investment Strategy Quarterly discusses the potential opportunities and challenges the new year may bring. With features broadly assessing the outlook for 2023, from an analysis of global developed markets to a search for context and opportunities against the backdrop of an economic slowdown. Read all this and more in Investment Strategy Quarterly: 2023 Outlook.

We would like to start this weekly note by wishing everyone a happy New Year. This has certainly been a busy first week back in markets with various data releases.

UK Prime Minister Rishi Sunak delivered his first speech of 2023 where he outlined five key targets for 2023. These include halving inflation, growing the economy, reducing debt, cutting NHS waiting times and stopping migrant boats crossing the border. The speech was described as “high on ambition but low in detail” with Mr Sunak making a bold demand that the public judge his premiership on the results achieved. Currently the opposition Labour Party hold a strong lead in the polls to win next year’s election, however Sunak will be hoping to rebuild trust in the Conservative Party.

In December we saw the US Fed slow down its aggressive rate hike trend and this led to a slower 50bps rise. The meeting minutes from December’s meeting were released on Wednesday. The key points were that policymakers are still focused on taming inflation that threatens to run hotter than anticipated and wanted to eliminate any “misperception” that their commitment to fighting inflation was wavering. The next phase for the Fed is to balance its fight against rising prices with the risk of slowing down the global economy too much. Their next meeting is scheduled for 31^st January, where another 0.5% rise is expected.

This afternoon we have seen non-farm payrolls for December come in hot as the US economy continued its strong run of job growth, adding 223k jobs. Unemployment is also down to 3.5%, beating the forecasted 3.7%. Government data showed there were 10.45 million job openings at the end of November, this translated to around 1.74 jobs for each unemployed person. This comes as a surprise to the market as major tech companies such as Twitter, Salesforce and more recently Amazon continue to cut thousands of workers after “over-hiring” during the 2020 pandemic.

On brighter news in Germany, inflation eased in December for a second consecutive month. Households received a one-off payment in December to cover energy prices and this had a downward effect on prices. Core inflation (excludes food and energy costs) still remains high, and this has created doubts in economists minds that a continued slowdown is not a given. President Nagel of the Bundesbank predicted that inflation levels would drop to 7% over 2023 before declining significantly in 2024.

Inflation in France also dropped in December, falling to 6.7%, down from a record high a month earlier. This is another sign that a mild winter and slowing energy prices are aiding Europe to overcome the inflation crisis. France has managed to keep inflation lower than other European countries due to government limits on regulated gas and power prices.

Falling inflation data in Europe helped propel European equities. After a strong final quarter of 2022, the unloved equity market has had a strong start in 2023, with the Euro Stoxx index rising close to 3% this week. UK equities have also had a strong start to the year, with both the FTSE 100 and more domestically focused FTSE 250 rising. The US market has been the outlier this week, with the headline index struggling, being dragged down by large falls in stocks such as Tesla, which fell nearly 14% on Tuesday, after declining 65% in 2022.

It was a mixed start to 2023 for commodity markets, with gold nudging higher while oil continued its general downtrend of recent months. Crude oil is currently trading around $73 a barrel, $5 lower than 12 months ago and considerably lower than recent highs of $120 a barrel in March 2022. This weakness in oil is likely to feed into the upcoming inflation data releases and should further support the view that inflation (in the US at least) has now peaked and will fall this year.

As we look forward to this year, a fund manager reminded us to “never waste a good crisis”. 2022 was a tough year across most asset classes and regions however this has created opportunities and with strong portfolio diversification and active management we believe that the outlook is positive for long term investors.

Andrew Triggs, Head of Investments & Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Financial markets continued their revival from the early summer lows through November as investors’ perceptions regarding the risks prevalent throughout 2022 diminished somewhat. That those risks had not disappeared completely was evidenced by violent protests breaking out across China at the end of the month in response to the new Chinese government’s apparent desire to persist with its aggressive “zero Covid” policy.

Even those with the longest careers in the financial markets are struggling to remember a year quite as tumultuous as 2022 has proved to be. Military conflict in Ukraine and sabre-rattling over Taiwan have made headline news all year and served to intensify volatility across all international financial markets.

Are you ready for some football? Not American football, but global football—otherwise known as soccer! For the five billion spectators awaiting the start of the 2022 World Cup in Qatar this November, the sport is the epitome of speed and agility. But for the players on the 32 participating teams, it is so much more. The deceptively simple-seeming game requires years of training. It goes beyond the fundamentals of ball control to pitch awareness, anticipation, and making the right decisions under duress quickly.

What the Chancellor, Kwasi Kwarteng, presented to the House of Commons on Friday was definitively not a Budget; it was ‘The Growth Plan’. The sixth chancellor since 2016 was careful to avoid the B word, despite the huge sums of spending and borrowing that he announced – greater than in most, if not any, real Budgets, let alone mini-Budgets. When the Autumn Budget proper emerges – probably in November or December it is most unlikely to contain anywhere near such a wide range of radical and costly measures as were announced on 23 September.

The investing environment could hardly be more challenging. Global economic activity is slowing, Western developed economies are flirting with recession, inflationary pressures are extremely elevated, and Western central banks remain committed to raising interest rates in a concerted effort to bring them under control. The geopolitical backdrop is still as dark as ever; the war in Ukraine continues, China’s bellicose threats against the United States ahead of House speaker, Mrs Nancy Pelosi’s visit to Asia have become more pointed. Europe faces a natural gas shortage over the coming winter, Dr Mario Draghi’s Italian government has collapsed, while in the UK, the same fate has befallen Mr Boris Johnson’s administration.

More than 200 years ago, a French military officer stumbled across the Rosetta Stone, a 2000-year-old carving with clues to deciphering the Egyptian hieroglyphs that had puzzled the world for centuries. We don’t exactly have a Rosetta Stone for our perplexing market’s future – no one does. But just as the Rosetta Stone opened a window into Egypt’s mysterious past, we have some clues that might help investors crack the code in the coming months.