January 2023 | Monthly Economic Update
Source: Zephyr Style Advisor
December was a difficult month for equities, as was the year. US equities, as measured by the S&P 500, fell 5.8%, bringing the index’s return for the year to -18.1%, its worst year since 2008. International developed equities eked out a small gain of 0.1%, helped by a falling US dollar. Finally, emerging market equities also fell 1.4% despite strong gains from China on reopening potential. Contributing to December’s performance were themes seen throughout 2022: continued hawkish central bank policy to combat inflation, the ongoing Russia-Ukraine conflict, and lingering fears of a recession.
Sectors within the S&P 500 all saw declines in December. Defensive sectors, such as utilities, healthcare, and consumer staples, provided the least downside, whereas more sensitive and cyclical sectors, such as consumer discretionary and technology, declined the most. Energy was the only positive sector for the year, rising a staggering 65.7%. For equity styles, there was a significant disparity between value and growth, particularly for the year, with value outperforming growth’s 2022 performance by a spread in excess of 23%[i]. Growth’s struggles primarily can be attributed to the style’s greater sensitivity to rising interest rates and high starting valuations. Despite performing relatively better, value indexes were still in the negative for both the month and year.
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Moving to fixed income, international bonds outperformed domestic bonds for the month as the dollar fell. The global bond index was able to post a positive return of 0.5%. Long duration and lower-quality bonds were hardest hit, owing to continued interest rate increases and uncertainty around a looming recession. Short-term treasury bonds and municipal bonds were the positive indexes for the month.
Broad commodities retreated in December, declining 2.4%. Energy was the primary detractor for the index, while most other commodity sectors were positive. The positive standouts were precious metals, with silver leading the pack. Despite a strong year, the dollar continued its quarterly decline, falling an additional 1.9% in December as investors weighed the prospect of cooling inflation and declining growth. Lastly, REITs declined 5.0% as the housing market continued to slow and fears of a slowing economy grew.
The blended 60/40 index using global equities and global bonds returned -2.1% in December. Allocations to equities, REITs and commodities hurt, while bonds and gold helped. Expanding the view to 2022, commodities were the sole positive performer, owning much of that performance to the spikes in energy prices. And despite some of the worst returns in bonds on record, global bonds helped the 60/40 relative to equities and REITs in 2022.
Source: Zephyr Style Advisor
The Monthly Riddle
I have cities, but not houses. I have mountains, but no trees. I have coasts, but no sand. What am I?
LAST MONTH’S RIDDLE: I went into the woods and got it. I sat down to seek it. I brought it home with me because I couldn’t find it. What is it?
ANSWER: A splinter.
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