A Look Back at 2022... and Ahead to 2023

2022 was a tumultuous year for investors, to say the least. Markets around the world were affected by high inflation, rising interest rates, and concerns about slowing economic growth in 2023. The S&P 500 dropped -19.4% in 2022, while the Nasdaq and MSCI EAFE fell -33.1% and -16.8%, respectively. The S&P/TSX fared slightly better, closing the year at -8.7%.

It's probably safe to say that most investors won't be sad to see 2022 go. Here's a closer look at some of the areas that made their mark in 2022 and will continue to shape the economy in the coming year.

Inflation: The cost of living remained stubbornly high throughout the year. Prices in the U.S. peaked at 9.1% in June driven by higher wages, housing, fuel, and food prices compared to 12 months earlier. However, there are signs that inflation is softening, and by the middle of 2023, it's expected to be cut in half. While equities will experience some headwinds in 2023, softening inflation could boost equity prices.

Interest rates: The U.S. Federal Reserve (Fed) began its aggressive rate-tightening cycle in March to curb inflation, along with many of the world's major central banks, including the Bank of Canada. The Fed indicated it intends to continue to hike rates further in 2023, but there's a clear sense that they're close to winding down the cycle. We should expect to stay at peak rates for some time in 2023 to ensure inflation trends towards its target of 2%, however, it will take a recessionary environment to move to the next phase of Fed policy-cutting interest rates.

Russia's invasion of Ukraine: Russia's aggression in Ukraine and its impact on energy and agricultural commodities have caused significant global economic disruption. Russia's blockades of Ukrainian ports halted grain exports for months, contributing to widespread food scarcity. Much of Europe is scrambling to ensure energy security in the wake of Russia's cut of gas supplies to the rest of the continent. In the short term, these issues will pose challenges for the European economy.

China's reopening: China's zero-COVID policy put a damper on the Chinese economy and was a cause of supply chain disruptions over the past couple of years. Recent headlines indicated a relaxation of these policies in Mainland China. While this is encouraging, uncertainties remain for investors. In the coming months, vaccination and fatality rates, healthcare capacity, and government responses to a rise in cases will be signs to monitor.

Recession concerns: The probability of a recession in 2023 continues to rise as we have yet to see the impacts of higher interest rates. Consumers are dipping into their savings to fund their consumption and are likely to face challenges with higher interest rates. However, a tight labor market and strong wage growth will help the consumer remain resilient. Markets are forward-looking, and last year's performance would have factored a shallow recession. Markets could drop further if we experience a severe global recession, but as of today, those odds remain low.

What lies ahead? We've often compared investing to a road trip, and there may be some bumpy roads ahead. While perhaps not very reassuring, it's helpful to remember that market corrections are normal, and that it's best to remain focused on long-term goals and not let pit stops derail us from our destination.

As always, if you have any questions about the markets or your investments, we are here to talk.

This newsletter has been prepared by Raymond James Ltd. (“RJL”). It expresses the opinions of the writer, and not necessarily those of RJL. Statistics, factual data and other information are from sources believed to be reliable, but accuracy cannot be guaranteed. It is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. RJL, its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. It is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Raymond James Limited is a Member Canadian Investor Protection Fund.