Stocks got wrecked by rate shock in 2022. Here’s what will drive market in 2023.

2022 is over. Take a breath.

Investors were understandably eager to ring the bell on the stock market’s worst year since 2008, with the S&P 500
falling 19.4%, the Dow Jones Industrial Average
dropping 8.8% and the Nasdaq Composite
shedding 33.1%.

Adding to the pain, the bond market was also a disaster, with some segments seeing their biggest annual losses in history while U.S. Treasury prices slumped, sending yields soaring.

That offered a rare double whammy for investors, who usually see portfolios cushioned by bonds when equities suffer.

So now what? The flip of the calendar doesn’t make the factors that drove market losses in 2022 go away, but it offers investors an opportunity to think about how the economy and the markets will evolve in the year ahead.

A rate shock as the Federal Reserve ratcheted up interest rates at a historically rapid pace in its effort to rein in inflation set the tone in 2022. A return to higher rates — and what may be the end of a four-decade era of falling interest rates — is expected to reverberate in 2023 and beyond.

The Tell: End of 40-year era of falling interest rates is crucial ‘sea change’ for investors: Howard Marks

While inflation, still elevated, shows signs it has peaked, the market was robbed of a seasonal rally heading into the new year by fears the Fed’s continued efforts will spark a recession that will devastate corporate earnings in 2023.

Read: How a Santa Claus rally, or lack thereof, sets the stage for the stock market in first quarter

The interplay between Fed policy, inflation, economic growth and earnings will drive the market in 2023, analysts say.

The Fed

“This has been a Fed-led market that’s been predicated on inflation that was not transitory,” as monetary policy makers had initially believed, said Quincy Krosby, chief global strategist at LPL Financial, in a phone interview.

The Fed dropped the “transitory rhetoric” and launched an…


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