By Kelvin Lee, Alonso Munoz
On February 2nd, 2022, we wrote the following to our clients: “…we expect continued turbulence as the markets adjust to hawkish monetary policy. In other words, we will keep the “seatbelt sign” on!”. In hindsight, this now seems overly optimistic as we close out a historically brutal year for financial markets.
Although it’s easy to highlight the obvious negatives, specifically in financial markets and the Ukraine war, it was a remarkable year for innovation, science, and progress. Among many events, NASA crashed a spacecraft into an asteroid (Does anyone else love the movie Armageddon?), the first person of color took power as the head of the British government, and the U.S took legislative steps to slow global warming. We broke this year down by month to highlight some notable events, many of which will have lasting impacts for years to come:
January – The U.S. Fed begins to set the stage for one of the most aggressive rate hiking cycles in 50 years. A majority of Wall Street, including us, underestimated how high inflation would climb, and the Fed’s historic actions to attempt to lower it.
February – Russia invades Ukraine. After weeks of high tensions, lies and false flag operations, Russia begins “special military operations” in Ukraine. Heavy bombing occurs in major cities with millions of refugees fleeing their homes. Energy and commodity prices soar in concurrence with sanctions on Russian oil.
March – The Federal Reserve starts its path of rate hikes. Raising the fed fund rates from zero to 25bps, the central bank begins quantitative tightening and plans to reduce its balance sheet until CPI hit a 2% target. Investors and companies had enjoyed extremely generous financial conditions up to that point: near zero interest rates and a stimulated economy. However, monthly fed bond buybacks and low borrowing costs resulted in 8% plus inflation, signaling the move to start hiking.
April – Q1 earnings hurt markets. Following poor guidance, and a rising rate environment, investors begin to sell off stocks, with the tech focused Nasdaq taking the hardest hit. Netflix sparked the drop with its share price falling by more than 43 percent after reporting a decline in subscribers. Elon Musk also agrees to buy Twitter.
May – Equities enter bear market. Stocks suffer once again as the federal reserve accelerates its tightening schedule with a 50bps increase in interest rates. Fears continued to persist regarding inflation, QT, supply chains and war in Ukraine.
June – Inflation peaks . The June consumer price index comes in at a year high of 9.1%. The fed responds with another accelerated 75 bps rate hike, pushing the fed funds rate to a 1.5% – 1.75% range. The S&P 500 declines another 8%, making new year to date lows. The Supreme Court overturns Roe Vs. Wade, ending 50 years of abortion protections.
July – Recession. July’s numbers show a second consecutive quarter of GDP contraction, indicating that the U.S. is in a “technical recession”. The National Bureau of Economic Research and white house avoid labeling the negative GDP print as a recession, even when technical requirements would characterize it as such. Nancy Pelosi visits Taiwan, further escalating the US/China tensions.
August – A market rally story emerges. With August CPI’s print coming in below July’s, investors bought risk assets, hoping that the federal reserve would adjust its pace of hikes. Jerome Powell, chairman of the U.S. Fed, crushed this narrative with continued hawkish rhetoric.
September – Queen Elizabeth dies after 70 years in power. New lows, stormy rates. Hurricane Ian hits coast of Florida, causing over $80 billion in damages. Equities continue to fall as the fed raises rates by another 75bps. That’s the third one in a row. Bond yields rose significantly with the 10-year treasury bond crossing the 4% yield barrier, not seen since the 2008 financial crisis. In the U.K., the Bank of England announces unlimited bond buybacks as their 30-year bonds cross 5% to restore normal market conditions.
October – Rebound again. The S&P 500 rallied another 7%. Market participants again chased the earlier year pivot story, citing fed members that saw a risk of overtightening . The ten-year treasury bond peaked at a stunning 4.23% during this month.
November – Midterms and FTX. The big red wave prediction failed to manifest with Republicans only winning a small majority in Congress. In the meantime, Sam Bankman-Fried’s colossal crypto exchange FTX collapses, with billions of dollars in investor money lost. The FTX collapse will be remembered as one of the largest cases of fraud in the 21st century. Markets continue to rally as inflation drops below 8%. The fed raises rates 75 bps.
December – China ended its zero covid tolerance policy and reopened domestic business and travel. In U.S. markets, the two and ten-year bond inversion reached negative 85 bps, the most inverted it’s been in the last 40 years. The fed slowed its pace of hikes to only 50bps this month, with inflation expecting to come below 7% next print. Netflix released “Harry & Meghan”. Global viewers spent more than 81.55 million hours watching the series in its first week of release. Lastly, the U.S. House passed a $1.7 Trillion funding bill. This includes the much-anticipated Secure Act 2.0.
It’s going to be a great 2023. Happy New Year!
To contact the author of this story:
Kelvin Lee at kelvin@hamiltoncapllc.com
To contact the editor responsible for this story:
Alonso Munoz at alonso@hamiltoncapllc.com
