US Stock Market Suffers Worst Year Since 2008—Is More Pain Ahead in 2023?
US Stock Market Suffers Worst Year Since 2008—Is More Pain Ahead in 2023?

By Andrew Moran

Investors will be quick to turn the calendar year to 2023 after the U.S. stock market suffered its worst annual performance since 2008, driven by elevated inflation, global recession fears, and tightening monetary policy.  

The leading benchmark indexes suffered notable losses in 2022, led by the tech-heavy Nasdaq Composite Index’s 33.1 percent decline. The S&P 500 plummeted 19.44 percent, while the Dow Jones Industrial Average slumped 8.78 percent.  

By comparison, the Nasdaq plunged 40.54 percent, the S&P 500 tumbled 38.49 percent, and the Dow Jones lost 33.84 percent in 2008.  

According to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, the abysmal performance in equities marked the end of an era of easy money policies.  

“The most important take of the year is: the era of easy money ended, and ended for good,” she wrote in a note. “This is the beginning of a new era, when central banks will be playing a more subdued role in the markets, with less liquidity available to fix problems—a more than necessary move that came perhaps too late, and too painfully.”  

In March, the Federal Reserve launched its tightening cycle by raising the benchmark fed funds rate (FFR) by 25 basis points. By December, the central bank pulled the trigger on 425 basis points, lifting the target rate to 4.25 and 4.50 percent, the highest level in 15 years.  

Traders work as Federal Reserve Chair Jerome Powell is seen on a screen delivering remarks at the New York Stock Exchange on March 16, 2022. (Brendan McDermid/Reuters)

Fed officials anticipate that the FFR will top 5 percent in 2023 before easing to 4.1 percent in 2024 and 3.1 percent in 2025, according to the Survey of Economic Projections (SEP)

But it was not all bad news in the financial markets, especially in the energy sector.  

Commodities the Lone Bright Spot in 2022  

Although crude oil wiped out its post-invasion gains, prices outperformed the broader market.  

West Texas Intermediate (WTI) crude advanced 6.71 percent to above $80 a barrel on the New York Mercantile Exchange, while Brent crude surged more than 10 percent to just under $86 per barrel on London’s ICE Futures exchange.  

Natural gas also enjoyed a bullish 2022, climbing nearly 14 percent on the year. Despite the double-digit gain, natural gas had soared as much as 162 percent this past summer.  

Newcastle coal futures also increased 150 percent to about $400 per ton.  

Will it be more of the same?   

Phil Flynn, an energy strategist and author of The Energy Report, believes so, telling The Epoch Times that he is “very bullish on prices going into the new year.”  

“I’m not going to be surprised to see oil eclipse triple digits once again,” he said, citing tightness on the supply side and global spare production capacity “near historic lows.”  

ING also anticipates oil prices to average $100 in 2023.  

“There is still plenty of uncertainty over Russian oil supply given the EU’s ban on Russian crude oil and refined products,” the financial institution wrote in a report. “However, we believe that Russian supply will fall significantly early next year—in the region of 1.8MMbbls/d year-on-year in the first quarter. This supply loss coupled with continued OPEC+ supply cuts suggests that the oil market will tighten over the course of 2023. US supply growth will not be able to fill the gap, with US producers showing a lot more capital discipline. As a result, we expect ICE Brent to average US$104/bbl next year.”  

The broader commodities sector also had a great year, led by orange juice’s meteoric ascent of 45.56 percent. But other agricultural products have rallied. Corn surged 14.51 percent, soybean advanced 13.77 percent, live cattle picked up 13.09 percent, and wheat jumped 2.69 percent.  

Despite a tough eight-month period from March to November, the yellow and white metals posted exceptional gains in the home stretch of 2022.  

Gold prices erased their losses and ended the year flat at $1,830.10 per ounce on the COMEX division of the New York Mercantile Exchange. Silver finished 2022 up 3.53 percent, thanks to a 27 percent rally in the fourth quarter. Platinum swelled 12.46 percent to above $1,000. However, palladium and copper slumped 5.99 percent and 14.35 percent, respectively.  

Cryptocurrency and Bonds  

The cryptocurrency industry and the bond market suffered sharp losses in 2022.   

The crypto industry wiped out approximately $1.4 trillion in market cap, led by sharp losses in Bitcoin (negative 65 percent), Ethereum (negative 68 percent), Cardano (negative 81 percent), Dogecoin (negative 59 percent), and Polkadot (negative 84 percent).  

According to LPL Research, 2022 was the worst year on record for bonds, with the Bloomberg Aggregate Bond Index suffering a 13 percent loss.  

Souvenir tokens representing cryptocurrency networks Bitcoin, Ethereum, Dogecoin, and Ripple plunge into water in this illustration on May 17, 2022. (Dado Ruvic/Illustration/Reuters)

“When stocks are down investors typically re-allocate to bonds, as bonds have historically exhibited a negative correlation to their stock counterparts,” stated Jeffrey Buchbinder, a chief equity strategist at LPL Research. “Unfortunately for traditional investors, that relationship did not hold in 2022, as both bonds and stocks have suffered double-digit losses over the calendar year with just three trading days left. Only four other times since inception has the Bloomberg (formerly Barclays/Lehman) Aggregate Bond Index (Agg) realized a negative calendar year return, with 2022 realizing the worst return by far. The previous worst year on record was 1994 with a 2.9% loss, far better than 2022’s year-to-date loss of nearly 13%.”  

Despite its historic losses in 2022, Bryce Doty, the senior vice president and senior portfolio manager at Sit Investment Associates, thinks the bond market looks more attractive next year. 

“We expect core bond funds to have total returns between four and eight percent in 2023, with most of that coming from interest income plus a modest amount of price appreciation as yields move moderately lower,” he said.  

What Will 2023 Look Like?  

Ken Mahoney, the CEO of Mahoney Asset Manager, projects that opportunities will be abundant for investors in 2023.   

“However, the opportunities and strategies will be much different than we had seen in the ‘golden decade’ for stock investing and will look very similar to what we saw this year,” he wrote in a note. “The reason being for this is because not much in the macro picture has changed going into the new year.”  

Inflation is higher and persistent, the Fed continues to tighten, and recession is the base case for many investors on Wall Street, Mahoney added.   

That said, Nancy Tengler, CEO and CIO of Laffer Tengler Investments, thinks this is a perfect time for long-term investors.   

“I haven’t said this yet but I think you want to buy sell-off, and continue to buy. Even if we get the expected volatility continuing into Q1 2023, we think you keep buying,” she said in a note.  

Market experts say that the Fed’s rate hikes are traveling throughout the financial system and, according to Arthur Laffer Jr., the president of Laffer Tengler Investments, they are doing their job, “albeit slower than everyone hoped.” 

“Inflation has peaked and we believe that it will continue to trend down over the course of the year but expect monthly volatility in the series both high and low,” he said in a note. “With higher interest rates will come lower GDP growth going forward and a recession in 2023 in the first half of the year. 3Q 2022 GDP revised higher most likely the result of economic activity accelerating in the first part of 2022 in anticipation of higher borrowing costs from the resulting Fed rate hikes. If this is correct then 4Q 2022 and early 2023 to be lower lending more credence to a recession in early 2023.”  

Dubravko Lakos-Bujas, the Global Head of Equity Macro Research at JPMorgan Chase, thinks weakness in stocks will re-test 2022 lows in the first half of 2023 but then end the year higher.  

“In the first half of 2023, we expect the S&P 500 to re-test the lows of 2022 as the Fed overtightens into weaker fundamentals. This sell-off combined with disinflation, rising unemployment and declining corporate sentiment should be enough for the Fed to start signaling a pivot, pushing the S&P 500 to 4,200 by year-end 2023,” Lakos-Bujas wrote.  

BMO, Jefferies, Wells Fargo, and RBC Capital share this projection. However, several financial institutions anticipate the S&P 500 to slump below 4,000, including Morgan Stanley, Scotiabank, UBS, and Barclays.

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