2022, characterized by soaring inflation and frantic Federal Reserve activity, saw both U.S. equities and bonds record double-digit yearly declines for the first time since the 19th century. 2023, however, is sizing up to potentially be a better year for some segments of the market.

Asset class performance
Total return, year to date

Source: Clearnomics, Standard & Poor’s, MSCI, FTSE Russell, Bloomberg, Principal Asset Management. Data as of December 29, 2022. Commodities = Bloomberg Commodity Index, Fixed Income = iShares Core U.S. Bond Aggregate Index, EAFE = MSCI EAFE Index, Balanced = Hypothetical 60/40 portfolio consisting of 40% U.S. Large-Cap, 5% Small-Cap, 10% International Developed Equities, 5% Emerging Market Equities, 35% U.S. Bonds, and 5% Commodities, EM = MSCI EM Index, Small Cap = Russell 2000 Index. Indices are unmanaged and do not take into account fees, expenses, and transaction costs and it is not possible to invest in an index.

2022 was a difficult year for markets as nearly all asset classes struggled against historic inflation. As of December 29, the S&P 500, Dow and Nasdaq are down 17.9%, 6.7% and 32.4% year-to-date on a total return basis, respectively. The 10-year U.S. Treasury yield began the year at 1.51% and now sits at 3.82%, while the U.S. Dollar, which had surged all the way to 128, has settled back around 104.

One year ago, U.S. equities were at all-time-highs, interest rates were near historic lows, and central banks were only just preparing to hike rates. Mere months later, the 40-year trend of both falling inflation and interest rates had been broken, as the U.S. Federal Reserve began its rate hiking cycle, plunging equities to bear market levels. Unfortunately, 2023 may present similar challenges as persistently restrictive monetary policy and the likely resulting recession will weigh on the broad equity market outlook.

There may be some silver linings in the year ahead, however. Inflation is already starting to decelerate due to improved supply chains and lower energy prices. Global equity valuations are considerably more attractive, and there may also be greater opportunities in core fixed income and real assets as interest rates stabilize. In 2023, diversification across asset classes is recommended; inflation mitigation continues to be necessary; and taking advantage of attractively valued global opportunities will likely be rewarded.