Stocks destroyed by exchange rate shock in 2022. Here’s what’s driving the markets in 2023.

Adding to the pain, the bond market was a disaster, with some segments seeing their biggest annual losses in history, US Treasury prices falling and yields rising.

That offered a rare double whammy for investors who saw portfolios backed by bonds when stocks suffered.

So what now? The change in calendar does not eliminate the factors that led to market losses in 2022, but it gives investors an opportunity to think about how the economy and markets will develop in the year ahead.

It set the pace for 2022 as the Federal Reserve raised interest rates at a historically fast pace in an effort to curb inflation. A return to higher rates – and what could be the end of four decades of falling interest rates? rates — is expected to reverberate in 2023 and beyond.

The Tell: End of 40-year period of low interest rates is a major ‘sea change’ for investors: Howard Marks

The market was denied a seasonal rally heading into the new year by fears that the Fed’s continued efforts would trigger a recession in 2023 that would destroy corporate earnings, even as still-rising inflation indicated it had peaked.

Read: A Santa Claus rally, or lack thereof, sets the stage for the stock market in the first quarter

The interplay between Fed policy, inflation, economic growth and earnings will drive the market in 2023, according to analysts.

Fed

“It was a Fed-led market driven by non-transient inflation,” Quincy Krosby, chief global strategist at LPL Financial, said in a telephone interview.

The Fed abandoned the “transitional rhetoric” and began an aggressive campaign to fight inflation. “This has led to a market that is worried about economic growth and whether we’re going into a significant economic recession in 2023,” Crosby said.

Inflation

Analysts say investors may find some optimism in signs that inflation has peaked.

“The days of below 2% CPI that we enjoyed from 08-20 are probably long gone. But inflation may fall enough (to 3%-4%) for the Fed to think it’s essentially on track (although it won’t say so directly since the target is still 2%, but for all intents and purposes we’ll see serious inflation starting in 2023 can come out without a problem,” said Tom Essaye, president of Sevens Report Research, on Friday.

Skeptics doubt that the slowdown in inflation will be enough to keep the Fed from raising interest rates above 5% and keeping it there for some time.

Hedge fund titan David Tepper said in an interview with CNBC in December that he is “short” on the stock market “because I have a lot of…no matter what the central banks tell me, the upside/downside doesn’t make sense to me.” they will.”

To see: Fed officials are reinforcing a tough message of slowing inflation with higher interest rates

Fears of recession

So far, the steady job market has optimists — and Fed officials — arguing that the economy can avoid a so-called hard downturn as monetary policy continues to tighten.

Also read: 3 recession scenarios await stock market investors in 2023

However, investors “expect an economic downturn to materialize in early 2023, evidenced by three-quarters of the S&P 500’s projected decline in returns and persistent defense sector trends,” CFRA chief investment strategist Sam Stovall said in a statement Wednesday. “The severity of the recession remains in question. We expect it to be moderate.”

The bear market for the S&P 500 dates back to Jan. 3, 2022, when it closed at a record high before beginning its slide. It ended with an annual loss of 19.4%.

“The average bear market since World War II has lasted 14 months and resulted in a 35.7% decline from the previous high,” Glenmede analysts said in a December note.

“About 12 months and 20%, the current bear market appears to be about 2/3 of the way through a typical bear market decline. The current market is following a similar trajectory to the average historical bear market so far,” they wrote. “Based on past trends, on average, bear markets go down until a recession ends, not until a recession begins.”

Related: How long will stocks last in a bear market? Wells Fargo Institute says it depends on whether a recession occurs