Economy and the US Stock Market 2022 Year in Review
COVID-19 is Still Around
As we review the year 2022, the first item on our list is COVID-19 is still around but no longer dominates the headlines. Effective vaccines and other medications combined with building immunity reduced its impact. The exception is China, which is struggling with the virus because of poor policy decisions and vaccines less effective than those in the United States. Consequently, companies are still working with supply chain disruptions, and one primary end market is not fully functional.
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Inflation Hit a 40-Year High
Inflation started surging at the end of 2021 and kept rising higher in 2022. Inflation peaked in June 2022 and has been trending down since then. The Consumer Price Index (CPI) reached 9.1% in June 2022 and declined to 7.1% in November 2022. Similarly, the Personal Consumption Expenditures (PCE) Index peaked at ~7.0% in June 2022 and was down to 5.5% in November 2022. Inflation is the highest in 40 years. But unlike in the early-1980s, unemployment is low, and job growth is high.
The primary cause of inflation is demand resurgence as the COVID-19 pandemic waned. Many manufacturers and service companies cut back on workers and orders during the pandemic. Demand snapped back quickly in 2022, and they could not ramp up to meet it. Worker shortages because of illness, deaths, retirements, and low immigration were the main factor. Next, oil and energy prices rose dramatically, exacerbated by the Russo-Ukrainian War. The War affected food prices too because Ukraine and Russia are prominent suppliers of wheat, sunflower seeds, seed oils, and other items.
Also, the well-publicized semiconductor shortage continued to influence new cars’ availability, driving used car prices higher. Next, supply chain disruptions caused by China’s poor response to COVID-19 have had an outsized effect on American companies relying on the country as their sole manufacturing base. Other influencing factors were Hurricane Ian in Florida, the recent arctic bomb, a potential rail strike, etc., that made 2022 a perfect storm for rising inflation.
Interest Rates are A Lot Higher
The central bank’s response to high inflation has drained liquidity in the American economy and moved interest rates higher. First, the Federal Reserve and Chairman Powell stopped buying U.S. Treasuries and mortgage-backed securities (MBS), removing stimulus. Next, they started to let the Fed’s balance sheet taper. Lastly, they aggressively raised interest rates.
The balance sheet peaked at nearly $9 trillion in mid-April 2022. The value is down to a little over $8.5 trillion at the end of 2022, a significant drop. Similarly, the Federal Funds rate has risen from essentially zero percent to 4.33% at year-end. The rate will probably go higher in the first half of 2023.
The consequences have been significant as investors and speculators moved out of riskier assets and parked money in cash. Treasury bills and bonds from 1-month to 2-years yield more than 4%. Intermediate and long-term U.S. Treasuries are yielding 3.5% to 4.0%. In addition, U.S. Government-issued Series I Savings Bonds are paying the highest interest in many years. In mid-2022, investors could purchase new savings bonds yielding nearly 10% for six months, although the fixed rate was zero percent. Today, investors can buy short-term bonds and lock in excellent yields not seen in a decade.
Mortgage rates surged and are much higher than at the end of 2021. The 30-year fixed rate mortgage moved from roughly 3% to 6.42%, while the 15-year fixed rate mortgage went from about 2.5% to 5.68%. The result was lower housing sales and builder activity.
The United States Economy is Resilient
Despite the doomsday forecasters predicting hyperinflation, stagflation, recession, and the like, it did not come to pass in 2022. Of course, we may still experience a recession in 2023, but the United States economy has proven resilient for now. It is still growing even during a period of rapidly rising interest rates.
The Gross Domestic Product (GDP) rose strongly in 2021 because of pent-up demand and record federal stimulus. But the first quarter of 2022 was a different story as the GDP contracted sequentially by (-1.6%), followed by a decline of (-0.6%) in the third quarter. In addition, higher interest rates caused construction and manufacturing activity to decline. But in the third quarter, the American economy rebounded, growing 3.2%.
Despite recession fears and the naysayers, the unemployment rate is even lower than at the end of 2021. In November 2022, the rate was 3.7%. So, barring a deep recession, low unemployment will likely be here for 2023. The number of job openings has tapered some, but it’s still at about 10 million monthly.
The Stock Market Did Poorly
What worked in 2021 did not in 2022. After two stellar years, tech and growth stocks had their worst year since the subprime mortgage crisis in 2008. If history repeats itself, 2023 will be a good year for the Nasdaq with a return to a bull market. But there is a good chance it will not.
Inflation combined with rising interest rates made risky assets even riskier as traders exited positions and moved cash to the sidelines. The work-at-home and play-at-home trends diminished, and people returned to pre-pandemic lifestyles. Some companies were challenged with supply chain disruptions and higher labor costs. In some cases, demand waned, like at grocery stores. But in other businesses demand grew as people started to eat at restaurants, attend sporting events, go to movies and the theater, travel, etc. Moreover, energy costs rose dramatically because of soaring oil prices. The net result was a change in an investment thesis that worked for several years but did not in 2022.
All the major indices and markets were down in 2022. But the Dow Jones Industrial Averages (DJIA) performed the best. In fact, it was the most significant difference between the Dow 30 and Nasdaq in almost 20 years. Previously high-flying tech and growth stocks plummeted. For instance, Amazon (AMZN) strongly benefitted during the pandemic but struggled in 2022. Demand tumbled, and competition heated up. Also, the e-commerce giant overextended itself, entering many markets, increasing costs but not generating profits. As a result, the stock is down almost (-51%) in 2022, trading at levels seen before the pandemic. Moreover, Amazon’s market capitalization is now less than $1 trillion.
According to Stock Rover*, the Dow 30 performed the best at (-8.8%). The S&P 500 Index was in a market correction at (-18.1%). Both the Russell 2000 (-20.3%) and the Nasdaq (-32.5%) were in a bear market.
Of the 11 sectors, only Energy and Utilities were positive. Consumer Defensive and Healthcare performed relatively well. The worst performing sectors were Communication Services, Consumer Cyclical, Technology, and Real Estate.
Looking at the asset classes, bonds had a terrible 2022 and the worst return in years. Long-term Treasuries performed the absolute worst. Of the asset classes, short-term T-bills and Gold did well. Bonds are typically a refuge but obviously not when interest rates are rising quickly.
The 2022 Year in Review – What have I Learned?
Cryptocurrencies were all the rage until 2022. I highlighted in my 2021 Year in Review how crypto went mainstream. But I also discussed their high risks and that they are only suitable for some. My foresight proved prescient. Those overinvested in crypto got burnt. Bitcoin (BTC), the most liquid cryptocurrency, was down nearly 65%. Other cryptocurrencies did not fare as well, and in some cases, they are worthless. Moreover, the exchange platform FTX failed, probably wiping out some speculators.
The bottom line is cryptocurrencies are high-risk, and investors should be wary. Despite attempts to create stable coins, they are seemingly backed by nothing, and the year 2022 exposed the risks. Moreover, when the bottom falls out, exchanges may not have enough reserves to meet redemptions.
This asset is risky because it is unregulated or, at best, lightly regulated. In addition, cryptocurrencies do not offer investors security, unlike some other investments. For example, in the United States, the Federal Deposit Insurance Corp. (FDIC), National Credit Union Administration (NCUA), and Securities Investor Protection Corp. (SIPC) offer savers and investors a level of security for money placed with banks, credit unions, and brokers.
Cryptocurrencies are relatively new. Hence, their behavior during economic slowdowns and recessions is not well-known. They are acting differently than anticipated. For example, some advocates stated they were an inflation hedge, but prices dropped drastically during high inflation and increasing interest rates. The causes are complex, but cryptocurrencies do not function like a currency or gold since they cannot be exchanged for goods or services and are not backed by a central bank.
Elon Musk’s Twitter Saga
Elon Musk is a genius. His impact on America and the world has been profound between PayPal, Tesla (TSLA), SpaceX, and his other companies. Moreover, his companies have made Elon Musk immensely wealthy. At one point, he was the richest person in the world but was recently passed by Bernard Arnault in 2022. However, his entry into the culture wars and subsequent acquisition of Twitter for $44 billion may be a mistake. Twitter was not consistently profitable before the purchase, and it is likely losing money now.
To date, the acquisition has probably worked differently than he intended. Twitter is losing users to competitors because of missteps and chaotic management. Some studies show that the platform will lose about 30 million users in the next two years. The goal was to cut costs, but it was seemingly done haphazardly.
However, the big problem is Musk is focused on Twitter instead of Tesla and SpaceX, the source of his wealth. He even brought engineers from those companies to examine the code. Since the purchase, Musk has sold $22.9 billion in Tesla stock, the stock down nearly 30%, and the market capitalization was cut by ~$700 billion. So, the Twitter acquisition is proving to be an expensive sideshow.
Bonds Help but Not Always
A general rule of thumb in investing is bonds are a refuge when stocks are down. Moreover, they reduce volatility. Unfortunately, both ideas were proven wrong in 2022. Long-term bonds performed worse than stocks because of rising interest rates. The bottom line was Treasury yields were rising, making bonds bought in past years unattractive.
In addition, the 60% equities and 40% bond retirement portfolio did poorly in 2022. Usually, investors select the Vanguard Total Stock Market Index Fund (VTSMX) and Vanguard Total Bond Market Index Fund (VBMFX) or comparable funds from Fidelity, Schwab, or BlackRock. Unfortunately, in 2022, this two-fund portfolio declined about 17% this year, not great but still better than an all-stock portfolio. The maximum drawdown from December 21, 2021, to October 13, 2022, was about (-20.5%), the second worst since 2010. It was only surpassed by the worst months of the pandemic.
The 2022 Year in Review – Dividend Growth Portfolio
Most indices and portfolios declined in 2022. The large-cap dividend growth portfolio dropped (-5.79%) versus the S&P 500 Index at (-18.11%). This comparison is for investor returns after accounting for reinvested dividends and additional purchases during the year.
The portfolio had five up months and seven down months. The best month was October, which was up +10.28% versus +8.10% for the Index. The worst month was September, when the portfolio was down (-9.72%) versus (-9.21%) for the Index. The portfolio generally did better than the Index during the down months and outperformed during the up months. This fact is why the dividend growth portfolio did better than the S&P 500 Index in 2022.
In the past 3-years, the dividend growth portfolio has outperformed the S&P 500 Index by nearly 1.5%. In the past 5-years, the difference is 1%. Since its inception, the dividend growth portfolio has outperformed the S&P 500 Index by about 0.4%.
The dividend growth portfolio does not include non-dividend-paying stocks. If a dividend is cut or suspended, the stock is sold.
The 2022 Year in Review – State of the Dividend Power Site
The Dividend Power site remained a popular investing site in 2022. According to Google Analytics, in 2022 (January 1 – December 30), the Dividend Power site had 58,611 users and 279,427 page views. However, these values are less than in 2021 because of a return to pre-pandemic type behavior and the bear market.
In addition, the number of Twitter followers increased to approximately 1,470 at the end of 2022. Similarly, Dividend Power’s free newsletter subscribers have grown to over 3,300 at year’s end.
On Seeking Alpha, Dividend Power now has 5,618 followers, almost up 400 since the end of 2021. Dividend Power moved into the top 1% of financial bloggers as tracked by TipRanks (an independent analyst tracking site). This ranking is only based on articles published on Seeking Alpha and does not include all the articles on the Dividend Power blog.
Besides Seeking Alpha, Dividend Power’s content has been featured on InvestorPlace, MoneyShow, TalkMarkets, Nasdaq, Business Insider, Forbes, Yahoo, MSN, ValueWalk, FX Mag, and leading investing and personal finance blogs in 2022.
According to Feedspot, Dividend Power is the 14th best dividend site and the 47th best personal finance site.
According to Google Analytics, the top ten countries where Dividend Power’s readers are located are the United States, Canada, United Kingdom, Germany, Spain, Netherlands, Sweden, Italy, Finland, and Czechia in 2022. The top five countries did not change from last year.
According to Google Analytics, the top ten cities where Dividend Power’s readers are located are New York, Chicago, Los Angeles, London, Ashburn, Atlanta, Toronto, Dallas, Houston, and Helsinki. This list has changed since last year. Dividend Power has more readers where the city is unknown, but they are not included in this list.
Besides the home page, the top ten posts based on page views (as tracked by Google Analytics) are listed below.
Coronavirus Dividend Cut and Suspensions List
UK High Yield Dividend Aristocrats in 2022
The List of Dividend Aristocrats in 2020
The List of Dividend Aristocrats in 2022
The List of Dividend Kings in 2022
The List of Canadian Dividend Aristocrats in 2022
The List of Dividend Contenders in 2022
Thanks for reading the 2022 Year in Review!
Prior Year in Reviews
- The 2021 Year in Review
- The 2020 Year in Review
- 2019 Year in Review: A Winner for the U.S. Stock Market
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.