By Liz Moyer, Peter Nurse, Scott Kanowsky and Yasin Ebrahim
Investing.com -- The year is heading to a close on a sour note with the hoped-for Santa rally failing to materialize. Worries about a recession in the New Year are weighing on growth stocks, adding to the dour mood.
As we move into the new year, here’s a look back at what happened in 2022.
First quarter: Volatility returns
January: While 2021 was marked by a period of calm following the pandemic’s swings, this year started out with a fresh bout of market volatility. The S&P 500 notched its worst month since the start of the pandemic in 2020. The Dow shed 3.2% for the month after touching a record high in the first week of January. Tech stocks took the brunt of the downturn.
Mid-month, Microsoft (NASDAQ:MSFT) surprised the market by announcing the $68.7 billion deal for game developer Activision Blizzard (NASDAQ:ATVI), a move that would expand its game library. The move created waves because Warren Buffett’s Berkshire Hathaway (NYSE:BRKa) revealed itself to be a buyer of Activision Blizzard shares in the quarter, as a merger arbitrage move. Ultimately, the Federal Trade Commission would step in to block the transaction on competition grounds.
As the month wore on, expectations started to build that the Federal Reserve would accelerate its tightening path for the year after forecasters initially estimated three rate hikes and then raised their prediction to five. Even the Fed headed into 2022 predicting three rate hikes.
By the end of the month, the Fed was signaling it would start to raise rates at its March meeting.
February: Stocks continued to strain under Fed rate hike expectations and inflation fears. The S&P fell 3% for February, extending its losses so far for the year to 8% and entering correction territory for the first time since the start of the pandemic. At the same time, the Dow shed 3.3% for the month and the Nasdaq fell about the same. By the end of the month, the tech-heavy Nasdaq was down 12% on the year.
Inflation was the initial culprit. Headline inflation in January was the highest since mid-1982 on an annualized basis.
The energy sector had been the strongest in equities for the first two months of 2022, and then Russia started its war on neighboring Ukraine in late February, which would ultimately send oil and gasoline prices to multi-year highs along with food commodities such as grain. The war exacerbated fears about inflation and shot an extra jolt of volatility into the equity markets, with Wall Street’s so-called “fear index,” the CBOE VIX Volatility Index, rising another 21% after surging 44% in January.
Despite the White House’s rollout of vaccines, treatments, and testing kits, the U.S. surpassed a grim milestone in the COVID-19 pandemic in February, crossing 900,000 cumulative deaths from the illness.
March: Stocks reversed course in March, with the S&P rebounding 3.7%, while the Dow rose 2.5%, and the Nasdaq rose 3.5%. Still, the damage had been done for the quarter as it ended with the S&P and Dow down more than 4% each and the Nasdaq down 9%, marking the weakest quarter since 2020’s first quarter.
With Russia’s war in Ukraine raging on and concerns about inflation pressuring the Biden administration, the White House announced a plan to release one million barrels a day of oil from the Strategic Petroleum Reserve for the next six months, the largest such release in U.S. history. The goal was to relieve pressure on oil supplies and ultimately lower gasoline prices at the pump, but both would continue to rise into the summer. The White House also announced a ban on imports of Russian oil and liquefied natural gas.
The month and quarter also featured the Fed’s first rate increase in more than three years as it launched its battle against soaring inflation. After the benchmark rate remained close to zero during the government’s big stimulus during the pandemic, the Fed did as promised and raised rates by a quarter point. It would be the first of several rate hikes for the year.
Second quarter: Brutal selloff
April: U.S. equity markets sold off sharply, with investors’ focus trained on inflation and the policy response from the Fed.
Annual inflation hit 8.5%, its highest since December 1981, driven by higher fuel prices. This prompted the Fed to signal a 50-basis-point hike would happen in May.
Weakness was widespread, but the growth-heavy Nasdaq was hardest hit. Netflix (NASDAQ:NFLX) was the headline act, falling sharply after reporting a net loss of subscribers in the first three months of the year, the first quarterly decline in users since 2007.
Billionaire Elon Musk agreed to buy social media giant Twitter for $44 billion, although it would take months of legal wrangling before the deal was finalized.
U.S. Treasury yields climbed as markets anticipated significant interest rate hikes, with the 20-year rate topping 3% for the first time since March 2019, while data showed the U.S. economy contracted in the first quarter for the first time since the second quarter of 2020.
Crude prices edged below $100 a barrel after IEA member countries agreed to tap their emergency reserves, while gas prices soared after Russian energy giant Gazprom (MCX:GAZP) halted shipments to Poland and Bulgaria, a move the EU described as “blackmail”.
In the news, Emmanuel Macron was reelected President of France, the number of confirmed COVID-19 cases topped 500 million worldwide, while the war in Ukraine centered around the Donbas region after Russian troops retreated from the Ukrainian capital, Kyiv.
May: The equities selloff continued in the first three weeks of the month, with the S&P 500 falling into bear market territory, before rallying back to end the month largely unchanged. The risk-off narrative remained the same, with concerns focused on inflation, monetary tightening, COVID, as well as the ongoing war in Ukraine.
The Fed kept its promise and increased interest rates by 50 basis points, the largest hike since 2000, and signaled more was to follow.
U.S. fixed income markets found support following the recent fierce rise in yields over recent months, but yields rose in Europe after euro zone inflation hit a record 8.1%.
Oil prices rose, with WTI topping $115 a barrel after the EU proposed banning all crude imports from Russia by the end of the year as a punishment for Moscow’s aggression in Ukraine.
This resulted in a gallon of regular gas in the U.S. climbing to the highest-ever recorded average price.
In the news, confirmed COVID-19 deaths passed the one million mark in the U.S., Sweden and Finland applied to join NATO, and Russia captured the Ukrainian city of Mariupol after a period of fierce fighting.
June: The dominant theme of the month was tightening monetary policy, as central banks around the globe took steps to combat rampant inflation.
The Fed hiked rates by 75 basis points, its largest increase in 28 years, after inflation rose to a 40-year high, and signaled more to come, while central banks in Canada, Australia, Norway, and Sweden also raised rates. The Swiss National Bank hiked for the first time in 15 years, the Bank of England raised by 25 bps, while the ECB ended its quantitative easing program and indicated that it would lift interest rates in July.
The notable exception was the Bank of Japan, which elected to maintain its very accommodative monetary policy, resulting in the yen falling to its weakest level since 1998.
Most global sovereign yields rose as it became clearer there would need to be an aggressive pace of rate hikes given the inflation threat, while equities slumped, sending the S&P 500 further into bear-market territory.
In commodity markets, European gas prices soared after Russia's Gazprom reduced Nord Stream 1's gas supply to Germany, threatening the region with energy shortages and possible blackouts.
In the news, five members of the far-right group Proud Boys were charged over their involvement in last year’s attack on the Capitol, U.K. Prime Minister Boris Johnson survived a party confidence vote in the wake of the ‘Partygate’ scandal, and the EU formally awarded Ukraine official candidate status.
Third quarter: Recession? What recession?
July: U.S. GDP contracted by 0.9% in the second quarter, putting the world’s number one economy in a so-called "technical recession." However, the National Bureau of Economic Research - the body charged with formally announcing a downturn - shied away from using that language.
Global inflation continued to intensify, fuelling bids by central banks to quell price growth. But debate raged over how much influence these policymakers could ultimately have due to some of the key drivers of the recent jump in inflation: namely, supply chain constraints and rising energy prices.
The Fed hiked interest rates by an unprecedented 75 basis points for the second straight month, but chair Jerome Powell signaled that a slowing in the pace of increases may be necessary going forward. However, that (partial) easing did not come to pass until December.
Across the Atlantic, the ECB faced similar issues, particularly from the impact of the looming energy crisis on the German economy, the Eurozone’s largest. The ECB's response was to push up borrowing costs, ending a nine-year experiment with negative official interest rates.
Elsewhere, in currency markets, fears that Europe was on the path toward a deep recession dragged the euro down to below parity with a rapidly strengthening U.S. dollar for the first time in almost two decades.
To complicate matters further for the ECB, Mario Draghi resigned as prime minister in Italy following a fruitless attempt to save a broad coalition. The decision effectively shattered a period of relative calm in Europe's third-largest economy and set the stage for parliamentary elections in September. Italy's bond and stock markets swooned.
In the U.K., it was one ethics scandal too many for Boris Johnson, who resigned as prime minister over a controversy involving the appointment of a politician accused of sexual misconduct.
Companies began reporting second-quarter results, with many firms struggling to match the unusually high earnings growth they saw in the summer of 2021.
The tightening monetary policy conditions placed additional pressure on the typically volatile cryptocurrency market, which saw several industry players routed by desperate investors looking to make withdrawals. However, Bitcoin still managed to rally back above $22,000 on hopes that the Fed would edge away from aggressive rate rises.
U.S. stocks closed the month higher, along with equities in Europe and Japan. The laggard was China, which continued to stick with strict COVID-19 restrictions despite their potential impact on the broader economy.
August: Investors came into August hopeful the Fed would slow the pace of rate hikes. In the first half of the month, major indices rallied thanks in large part to that sentiment.
But as the month wore on, concerns rose around ongoing COVID-19 lockdowns in China and the knock-on effects that they could have on global supply chains, as well as earnings forecast downgrades.
Then, Powell indicated in a key speech in Jackson Hole that policy will remain tight for "some time," and inevitably lead to "some pain" for households and businesses.
Stocks, which had already been slipping from a mid-month peak, dropped, with U.S. and Eurozone equities contracting in August. Tech firms - big beneficiaries of the era of near-zero borrowing costs - were particularly hard hit. Big players like Tesla (NASDAQ:TSLA), Microsoft, Amazon (NASDAQ:AMZN) and Google-parent Alphabet (NASDAQ:GOOGL) all fell by more than 6%.
But tech groups in China were boosted late in August by an agreement between Washington and Beijing that gave U.S. regulators access to audits of Chinese companies listed on American exchanges.
Elsewhere, the war in Ukraine saw European gas prices climb to an all-time high as worries mounted over dwindling Russian supplies. Energy prices in the region later retreated as the month came to a close in response to reports that the EU was preparing to unveil emergency measures aiming to decouple the costs of electricity and gas.
But the fallout from the looming energy crisis was clear: Inflation in the euro zone jumped to a fresh record 9.1%.
Policymakers at the ECB echoed Powell's Jackson Hole speech, hinting that a larger hike in interest rates in September would be needed to quell inflation even if it led to broader economic malaise.
September: Wall Street had its worst month since the early days of the pandemic as soaring inflation stoked predictions for unprecedented increases in interest rates by central banks around the world.
The Fed raised borrowing costs by 75 basis points for a third straight meeting and suggested that interest rates would remain higher for longer. Powell said that it was still unclear whether these rate hikes would lead to a recession or, "if so, how significant that recession would be."
The ECB also delivered a 75-basis point rate hike, bringing its benchmark deposit rate to the highest since 2011. President Christine Lagarde flagged that several more increases were still to come.
Inflation in the Eurozone remained stubbornly high, touching a fresh record of 10% in September. That came despite governments in Europe spending hundreds of billions of euros in an attempt to protect consumers and companies from spiking energy prices, which jumped during the month.
The G7 Group of Seven countries agreed to place a price cap on Russian oil from early December. Officials said they were hoping to limit a key source of Russian revenue that Moscow could use to fund the war.
Fuelled by the elevated inflationary environment, bond yields hit highs not seen for a decade. The U.S. 10-year increased to a little under 4% after starting the month at 3.1%, while Germany's 10-year note - a key benchmark for European debt - topped 3.1% for the first time since 2012.
Adding to the gloomy fixed income picture in Europe were parliamentary elections in Italy, where a right-wing bloc led by Giorgia Meloni secured a majority in the country's parliamentary elections. Meloni had suggested while campaigning that she will stick with economic policies required by the EU to unlock tens of billions of euros in post-pandemic aid necessary to rebuild the national economy. Italian BTPs fell following the result, while the country's stocks gained.
Outside the Eurozone, Liz Truss was appointed as the U.K.'s new prime minister after winning a Conservative Party leadership contest.
Her tenure was almost immediately mired in controversy. The unveiling of her government's so-called "mini-budget," which included a package of energy subsidies and unfunded tax cuts, sent U.K. sovereign bonds slumping and sterling plunging to its lowest level against the U.S. dollar since 1985. The Bank of England was forced to intervene days later to keep this dramatic fall from damaging deeply-exposed pension funds and impacting the country's broader financial system.
The tumultuous start to Truss's soon-to-be short time in Downing Street also coincided with another fraught episode in British history: the death of long-serving monarch Queen Elizabeth II.
Fourth quarter – Let’s Fight the Fed
October: Stocks entered rebound mode in the fourth quarter, with the Dow posting its largest monthly gain since 1976.
Escaping the clutches of bearish bets wasn’t straightforward. But fighting the Fed, or calling the Fed’s bluff on its hawkish plan, seemed a good place to begin. Betting against the Fed was given a helping hand somewhat from a few Fed members opining on the risk of overtightening.
As the narrative of a Fed pause, or a pivot, strengthened, Treasury yields dropped. Stocks found their footing. And the bears were soon on the back foot.
Still, there was the third-quarter earnings season to contend with. Fears were running high that performance from corporate America would show the squeeze on margins from red-hot inflation, a stronger dollar, and rate hikes. And squeeze, it did.
In big tech, the squeeze was more pronounced. Most FANG stocks delivered quarterly reports that fell short of Wall Street estimates. But Apple (NASDAQ:AAPL) turned savior, delivering a blowout quarterly report that renewed investor sentiment in big tech.
November: On the coattails of a bullish October, stocks continued to win favor among investors in November, delivering back-to-back monthly gains for the first time since 2021.
The month, however, got off to a rough start. After the Fed delivered another 0.75% jumbo rate hike, Powell hammered investor expectations for a Fed pause, warning it was much too soon for the central bank to think about pausing.
There wasn’t much time to reflect on the hawkish messaging from Powell as the U.S. midterm election was on the horizon. Predictions of a ‘big red wave’ of Republican political dominance failed to materialize. Republicans wound up with a smaller-than-expected House majority, while the Democrats kept control of the Senate. For Wall Street, the political gridlock was a win.
As political fears abated, inflation also cooled, stoking confidence that price pressures had peaked. There was growing belief that the Fed pivot was now closer than ever, and Treasury yields, which were in freefall, had seen the top.
On the final day of November, Powell delivered a speech that set up expectations for a slower pace of rate hikes but also warned that the job of lowering inflation was far from over.
But markets weren’t willing to buy into Powell’s higher-for-longer rates regime. Preferring to focus on expectations for smaller hikes ahead, investors began to bake in bets on a rate cut in the second half of 2023. This proved a fertile environment for risk assets, including stocks, to flourish.
But the story for cryptocurrencies was altogether different. Panic was breaking out. FTX, one of the biggest crypto exchanges, faced questions about solvency. FTX CEO Sam Bankman- Fried, known as SBF in the crypto world, tried to reassure users.
Rival crypto exchange Binance wasn’t sticking around for answers and swiftly announced it would offload its holdings of FTX’s native token FTT. The selling pressure on FTT intensified, as clients desperately tried to withdraw funds from the platform.
FTX scrambled to find emergency funding to plug an $8 billion hole, but ultimately failed, forcing the once-valued $32 billion crypto exchange to file for bankruptcy. As probes into FTX’s dramatic collapse ensued, the findings rattled sentiment on crypto.
December: The final month of the year brought the economy into focus as a red-hot jobs report pointed to underlying strength in the economy. Yet, the alarm bells that continued to ring in the bond market were now difficult to ignore.
The 2-10 Treasury yield curve saw its biggest inversion in about four decades, signaling increasing concerns about a potential recession.
Investors believed that the Fed, faced with the growing threat of a recession just as further evidence showed easing inflation, would confirm market expectations for rates to peak sooner rather than later with a cut to follow next year.
The Fed brought a sledgehammer to those expectations, forecasting rates would ultimately peak at a higher-than-anticipated 5.1% as it delivered its final rate hike of the year.
Powell reiterated that the fight against inflation remained the priority and a higher-for-longer rate regime was the new normal.
In the days that followed, risk assets fell out of favor as Treasury yields regained ground.
As 2022 draws to a close, investors still appear ready to rumble against the Fed, holding onto hopes the U.S. central bank will blink when a hard landing comes knocking.