Wall Street capped a quiet trading day with more losses on Friday as the S&P 500 closed out its worst year since 2008.
The benchmark index ended 2022 down 19.4%, or 18.1% including dividends. It’s its third annual decline since the financial crisis 14 years ago, and a painful turnaround for investors after the S&P 500 gained nearly 27% in 2021. According to S&P Dow Jones Indices, the index lost $8.2 trillion. .
The Nasdaq composite, heavy on technology stocks, suffered a bigger loss of 33.1%.
Meanwhile, the Dow Jones Industrial Average posted an 8.8% loss for 2022.
Stocks have struggled all year inflation has put increasing pressure on consumers and raised concerns that economies are headed for recession. Central banks have raised interest rates to combat high prices. The Federal Reserve’s aggressive rate hikes remain a key focus for investors as the central bank walks a fine line between raising rates enough to cool inflation but not enough to push the US economy into recession.
The Fed’s key lending rate was in the range of 0%-0.25% at the start of 2022 and will close the year in the range of 4.25%-4.5% after seven hikes. The US Federal Reserve predicts it will be between 5% and 5.25% by the end of 2023. His forecast does not call for a rate cut before 2024.
Rising interest rates have prompted investors to sell high-priced shares of tech giants such as Apple and Microsoft, as well as other companies that have prospered since the economy recovered from the pandemic. Amazon and Netflix have lost nearly 50% of their market value. Facebook’s parent company Tesla and Meta Platforms each lost more than 60%, their biggest year-to-date declines.
Russia’s intervention in Ukraine worsened inflationary pressure earlier in the year, making oil, gas and food prices more volatile amid ongoing supply chain problems. Oil closed around $80 on Friday, about $5 higher than where it started the year. But oil meanwhile rose above $120, helping energy stocks post a 59% gain in the S&P 500, the only gainer among 11 sectors.
China has spent much of the year implementing strict COVID-19 policies that have hampered production for raw materials and goods, but is now in the process of lifting travel and other restrictions. At this point, it is uncertain how China’s reopening will affect the global economy.
The Fed’s fight against inflation is likely to remain a major concern on Wall Street in 2023, according to analysts. Investors will continue to look for a better sense of whether inflation is easing fast enough to ease pressure from consumers and the Fed.
If inflation continues to show signs of easing and the Fed embarks on a rate hike campaign, that could pave the way for a recovery in stocks in 2023, said Jay Hatfield, CEO of Infrastructure Capital Advisors.
“The Fed has really been overweight in this market since last November, so if the Fed takes a break and we don’t have a big recession, we think that sets us up for a rally,” he said.
There was little corporate or economic news for Wall Street to consider on Friday. That, plus a holiday-shortened week, set the stage for mostly light trading.
The S&P 500 ended down 9.78 points, or 0.3%, at 3,839.50. The index lost 5.9% for 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 sharp losses earlier in the week. The electric car maker’s stock is down 65% in 2022, wiping out about $700 billion in market value.
Southwest Airlines rose 0.9% as operations returned to relative normal after mass holiday cancellations. Shares are still down 6.7% for the week.
Shares of smaller companies also fell on Friday. The Russell 2000 lost 5 points, or 0.3%, to close at 1,761.25.
Bond yields were mostly up. The yield on the 10-year Treasury, which influences mortgage rates, rose to 3.88% from 3.82% on Thursday. While bonds usually do well when stocks fall, 2022 has been one of the worst years for the bond market in history thanks to the Fed’s rapid rate hikes and inflation.
For the first week of 2023, there are some big updates on the employment market. This has been a particularly strong area of the economy and has helped to shore up the recession. That has made the Fed’s job even more difficult, as strong employment and wages mean it may have to stay aggressive to keep up the fight against inflation. This, in turn, increases the risk of slowing down the economy too much and leading to a recession.
The Fed will release the minutes of its latest policy meeting on Wednesday, potentially giving investors more information on its next steps.
The government will also release its November jobs report on Wednesday. This will be followed by the weekly unemployment update on Thursday. The closely watched monthly employment report is due on Friday.
Wall Street is also awaiting the latest round of corporate earnings reports, which will start flowing in mid-January. The companies are warning investors that inflation is likely to hurt their profits and revenues in 2023. That’s after spending most of 2022 raising prices on everything from food to clothing to offset inflation, though many companies have gone further and actually increased profit margins.
Companies in the S&P 500 are widely expected to report a 3.5% decline in fourth-quarter profits, according to FactSet. Analysts expect earnings to remain roughly flat through the first half of 2023.
US stock markets will be closed on Monday for the New Year’s holiday.