A fourth quarter rally ultimately ended in a December swoon for domestic markets, capping off the worst year for stocks since 2008. Bitcoin again stood out for all the wrong reasons with another quarterly decline bringing the fullyear rout to -65%. Value stocks continued to outpace growth, decisively breaking a multi-year pattern of underperformance. Of particular note, growth stocks were unable to regain leadership in the fourth quarter when longer-dated interest rates fell, inflation looked to have peaked and the US Dollar declined. This environment is usually supportive for growth stocks. Another multi-year trend reversed in 2022 with the superior performance of international stocks vs. the US. Leadership changes often emerge from volatility. Growth has outperformed value for 15 years; the prior cycle was 15 years. US beating international this cycle has lasted 12 years vs. an average of eight years since 1975. There have been several false starts with these potential leadership changes in the last 18 months; this one may be real.
What began as a market wobble in the first quarter turned into a full rout and bear market in the second as the S&P 500 dropped by more than 15% in a quarter for just the ninth time since the end of World War II. There was seemingly no investable asset class immune to the weakness as equities across the globe were hit hard, bonds posted another quarter of negative returns, crypto plunged and even many commodities pulled back as recession fears took hold. The second quarter also saw 90% of the trading days post an intraday move of at least 1% in the S&P 500, the most volatile reading since 2009. At the root of much of the weakness was inflation that continued to march higher, and the fear that in an effort to tamp out inflation the Fed would push the US into recession. With inflation running hot and central banks around the globe tightening in response, the more speculative areas of the market were hit hardest. Growth stocks witnessed a bear market just in the second quarter; when combined with losses from the first three months of the year, the index has a negative return of nearly -30% at the midpoint of 2022. Value stocks were relative stars by comparison, falling just -12% in the quarter and about -13% for the year. Small and midcap stocks also lagged their larger peers but nowhere was the damage as severe as in the crypto space. Long touted as a safe haven or inflation hedge, it proved to be neither as crypto currencies were trounced in the quarter. The flagship Bitcoin lost over half its value.