Company / Analytics

Analytics, 23 December 2022

2022 Stock Market Year Recap

In 2023, stock investors and share-holders are expecting great income gains from the market due to all that has happened in 2022.

This past year has been tension filled. Economic uncertainty, instability in international ties, and FED have so far driven the S&P 500 17% lower year-to-date. The best-performing sector has been energy, which is up about 50%, partially offsetting the massive losses recorded in other areas. In fact, except for the small gains made in utilities, almost every other sector has been in the red.

With that said, let’s do a quick review of how the year went for various sectors.

Real Estate (XLRE): Down 27%

Real Estate which has at times been considered the go to for defensive stocks this year was hardhit. Real estate had a rough 2022. With interest rates on the rise, it now faces higher borrowing costs and, thus, lower profit margins/leasing spreads. However, most real estate asset classes face challenges on their own as well. Residential real estate is cooling off after last year’s home-buying frenzy, commercial real estate remains bland, as hybrid working conditions have limited demand for office space, and retail locations still record soft foot traffic levels.

Some specialty asset classes remain rock solid, including cell tower REITs, but precisely for that reason, such stocks appear rather overvalued.

Healthcare (XLV): Down 2.5%

Healthcare stocks are doing somewhat well, considering the underlying market environment. Hospitals kept ordering medical devices, and pharma majors continued to post record sales and profits. Nothing to see here in terms of highlights, really. The sector is full of high-quality mega caps that enjoy reliable and recurring cash flows. I would expect stable performance moving into 2023 as well, excluding any valuation headwinds.

Industrials (XLI): Down 6.3%

Industrials were pushed by two major forces. Higher costs amid a highly-inflationary environment were offset by major gains in the aerospace & defense space. While most non-defense companies were impacted by compressed profit margins, the sector was rescued by defense behemoths enjoying massive tailwinds due to the ongoing war in Ukraine.

Basic Materials (XLB): Down 11.9%

Basic materials declined, on average, following commodity prices normalizing from last year’s extreme highs. Supply-chain issues in 2021 resulted in fantastic supply/demand for chemical providers and for miners of all sorts of minerals. In 2022, the market mostly came to its senses, resulting in mild losses for basic materials stocks.

Utilities (XLU): Up 0.4%

The utilities sector comprises a branch of boring but steady compounders. Households and businesses have continued to pay their electric and water bill, and utilities have continued paying out their stable and slowly but gradually-growing dividends – nothing surprising here. If you are looking to park your cash somewhere for relatively low-volatility returns, this was, is, and likely will continue to be the place – at least in the foreseeable future.

Financials (XLF): Down 14.3%

Financials were negatively impacted by high interest rates and lower assets under management. While banks have benefited from juicer net interest spreads, borrowing costs have affected the sector negatively, in general. BDCs (Business Development Companies) have fewer lending opportunities, personal and commercial loan volumes have plummeted, and asset management firms have seen their AUM fall amid softer asset prices. With the FED remaining hawkish, financials may continue to be under pressure moving into 2023.

Technology (XLK): Down 28.1%

Technology dominated the stock market over the past decade, with the sector’s peak point being during the COVID-19 pandemic, amid the critical role companies in the space had in our everyday lives. That said, most tech stocks had grown overvalued last year. Combined with the shaky macroeconomic landscape reducing future growth expectations and rising interest rates compressing valuations, the tech sector had a stormy time in 2022.

Consumer Discretionaries (XLY): Down 37.2%

Consumer Discretionaries was the second worst-performing sector in 2022, losing over 1/3 of its value. While consumer spending has remained relatively strong, inflationary forces have squeezed profit margins in the sector. Investors are also essentially betting that companies in the space will underperform if we undergo a prolonged recession. Consumer discretionaries remains one of the riskiest sectors as we enter 2023 for this reason as well.

Energy: Up 50.6%

Energy has to come first here, having been by far the best-performing sector of the S&P 500 in 2022. From the post pandemic recovering to the Russian war on Ukraine, the energy market transformed significantly during this period.

Specifically, following the West’s sanctions on Russian energy, a chain reaction started, resulting in energy shortages and existing energy transportation routes crumbling. The result? Oil, gas, and coal prices skyrocketed! Oil majors and companies in the space, in general, have been posting monster profits.

While commodity prices have somewhat eased, they remain quite elevated, so it wouldn’t be unlikely for energy to perform well in 2023 as well. Alliance Resource Partners was one of the best performers among energy stocks.

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