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Fourth-quarter 2022 market review with Jim Smigiel

January 19, 2023
clock 9 MIN READ

Chief Investment Officer Jim Smigiel provides an overview of the global financial markets during the fourth quarter and our perspective on them.

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- Hi, I'm Jim Smigiel, SEI's Chief Investment Officer, and over the next few minutes, I will provide a brief overview of the global financial markets and our perspective on them. Market performance itself was the big story as the year came to a close and the news was not good. A positive fourth quarter was not enough to spare the S&P 500 index, the MSCI ACWI Index or even the Bloomberg US Aggregate Index from double-digit losses for the year. In fact, this was the first year that both stocks and bonds delivered negative double-digit performance since the inception of the Bloomberg Index back in 1976. A quick look at the rest of the capital markets does not really improve the picture. Everything from emerging equities, to inflation-linked bonds delivered negative performance for the year. The loan standout for 2022 was broad-based commodities, as represented by the Bloomberg Commodity Index, which ended the year with strong double-digit positive performance. Reflecting these broader capital market trends, it's not terribly surprising that the energy sector was by far the top equity performer in 2022 and one of only two sectors to post positive performance for the year. The macro environment proved difficult for most asset classes, given the combination of supply chain pressures, war in Europe, and the aftermath of historically easy fiscal and monetary policy, which all combined to create significant and sustained inflationary pressures throughout the year. Central banks around the globe were forced to raise interest rates aggressively in an attempt to get inflation back under control. Higher inflation and higher interest rates are typically substantial headwinds for equities as margin pressures materialize from higher input and labor costs, as well as more expensive costs of capital. This environment hits growth stocks particularly hard as they tend to suffer from higher discount rates and lower multiples. And that was certainly the case in 2022 as the Russell 1000 Value Index outperformed the Russell 1000 Growth Index by well over 10% according to FactSet data. As I mentioned, fixed income markets were not immune to last year's volatility. The inverse relationship between interest rates and bond prices was on full display in 2022 as the yield on the 10-year Treasury bond increased roughly two full percentage points throughout the year. Double-digit losses in treasuries, corporate bonds, high yield bonds, and emerging market debt left investors with little respite from the highly unusual high inflation, slowing growth and strong employment macro environment. While these market conditions are not pleasant for anyone, they do further reinforce our confidence in core investing principles. Our most important principle is diversification. We can't predict the future, therefore we need to be prepared for multiple potential outcomes. When we have the opportunity, we seek to diversify our portfolios beyond traditional stock bond splits and include allocations to exposures, such as low volatility equity and inflation protection. These allocations can offer lower drawdowns and favorable correlation profiles in certain market environments. We also seek to build portfolios that help investors achieve their financial goals. While short-term performance is a popular focus, it is not a financial objective. Focusing on performance during down markets may actually cause investors to make reactionary changes to a sound investment plan. Setting a proper asset allocation and staying disciplined with that policy helps investors remain focused on their objectives during difficult market conditions. As I said last quarter, in volatile times like these, we believe our focus on diversification, fundamentals and sound planning matter more than ever. And on behalf of everyone at SEI, thank you, as always, for your trust and confidence.

Important information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Positioning and holdings are subject to change. All information as of the date indicated. There are risks involved with investing, including possible loss of principal. This information should not be relied upon by the reader as research or investment advice, (unless you have otherwise separately entered into a written agreement with SEI for the provision of investment advice) nor should it be construed as a recommendation to purchase or sell a security. The reader should consult with their financial professional for more information.

Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its affiliates assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI.

James F. Smigiel

Chief Investment Officer, Investment Management Unit

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