2022 in Review
As we enter the new year, investors the world over are happy to see 2022 end. For the year, the Nasdaq Composite was down 32.5%, the Russell 2000 lost 20.4%, the Standard and Poor’s (S&P) 500 declined 18.1%, and the Dow Jones Industrial Average was down 6.9%.
The pain wasn’t limited to only equities, as bonds, from a historical perspective, were more negatively impacted than most other asset classes. We might argue that bond returns in 2022 were one of the more meaningful stories in capital markets.
As we entered 2022, US headline inflation was already in the 7% range. However, the US Federal Reserve (Fed) was slow to initiate interest rate increases due to its assignment of the transitory moniker to the data, coupled with uncertainties regarding a prospective Russian invasion of Ukraine.
The month of March saw the first 25-basis point increase of the fed funds rate, with an acceleration to a 50-basis point hike, followed by a series of 75-basis point hikes, ending with a final 50-basis point increase; though interestingly, the Fed maintained the expansionary policy of its balance sheet until mid-year.
Conditions necessitating the aggressive Fed tightening were varied, though years of expansionary monetary and accommodative fiscal policy were primary drivers. US money supply, as measured by M2, rose over 40% in a three-year period ending March 31st, 2022, totaling well over $21 trillion. Household liquidity, defined as cash, deposits and money market funds, also expanded by over 35% during the calendar years 2020 and 2021.