Indexology^® Blog

2022 was a challenging year for equity markets, as central banks around the world hiked interest rates in response to surging inflation. U.S. equities were affected by the souring sentiment, with the S&P Composite 1500^® down 17.8% in 2022. More broadly, all 25 countries in the S&P Global Developed BMI declined in U.S. dollar terms since the end of 2021, while 15 out of 24 S&P Emerging BMI countries declined by the same measure. However, Latin American equities had a stronger year than most regional markets: Exhibit 1 shows that equity markets in Argentina, Chile, Brazil and Peru increased in U.S. dollar terms last year.

Sector exposures were a key reason for performance differences in 2022. Exhibit 2 shows that many Latin American countries benefitted from having more (less) exposure to out- (under-) performing GICS^® sectors compared to the S&P 1500™. Indeed, Latin American countries typically had greater weight in Energy, Financials, Materials and Consumer Staples, and less exposure to Information Technology and Consumer Discretionary.

Although the outperformance of domestic equity markets may be well received by investors across Latin America, some may wish to take a longer-term perspective. Over long-term horizons, the S&P Composite 1500 showed higher returns and lower risk compared to the country-specific indices. Exhibit 3 shows the rolling five-year risk-adjusted returns, where U.S. equities posted a higher return per unit of risk.

Combined with the less-than-perfect correlation between the performance of the S&P Composite 1500 and various countries in Latin America, it is unsurprising that Exhibit 4 shows that adding a U.S. equity allocation to a domestic equity allocation could have improved risk-adjusted returns, historically.

As a result, Latin American equity indices outperformed in 2022, as they benefitted from having less exposure to sectors that were most affected by higher interest rates. However, U.S. equities may still be relevant to investors in Latin America.  Combining U.S. equity exposures with a domestic equity allocation could have improved risk-adjusted returns, historically, and the U.S. market’s distinct sector exposures could help mitigate domestic sector biases.

The market standard commodities benchmark, the S&P GSCI, performed admirably in 2022, rising 26%, outpacing other commodities indices and asset classes, as well as defying higher interest rates and growing fears of a prolonged global economic slowdown, while high inflation provided a solid backdrop for one of the most inflation-sensitive asset classes. Commodities has been the best-performing major asset class for each of the past two years.

It is not surprising that the energy complex enjoyed the strongest performance across commodities markets in 2022, with the S&P GSCI Petroleum rallying 44.6%. Oil prices surged in March as the Russia-Ukraine conflict disrupted global oil trade flows, but prices reversed in the second half of the year as recession risks multiplied. At the end of December, Russia delivered its long-awaited response to the Western price cap, announcing that it would ban the supply of oil and oil products for five months to countries that are party to the cap, starting on Feb. 1, 2023.

It was a wild ride for natural gas in 2022; the S&P GSCI Natural Gas ended the year up 19.8%, following a decline of 33.5% in December. Supply disruptions due to the Russia-Ukraine conflict sent global gas markets into override, but prices have more than halved since their mid-year highs, with stronger U.S. production and milder weather contributing to the reversal.

Despite starting the year with solid gains, industrial metals ended the year in negative territory, with the S&P GSCI Industrial Metals declining 7.6%. Inflation, COVID-19 lockdowns in top consumer China and coordinated interest rate rises hampered economic growth and weakened demand for industrial metals used in the power and construction industries, such as copper. 2022 will also be remembered as the year that the nickel market was rocked by a period of disorderly trade on the LME, leading to elevated periods of volatility and a slump in liquidity.

Performance across the agricultural markets was mixed. An ongoing drought in top soybean meal exporter Argentina and less competition from alternative oils such as sunflower and palm supported soybean prices, with the S&P GSCI Soybean ending the year up 28.9%. Wheat prices jumped to an all-time high following the Russian-Ukraine conflict (both major exporters of wheat). However, Black Sea exports picked up in the second half of the year, helped by a deal to create a safe shipping corridor for Ukrainian wheat and a record Russian harvest, ensuring that the S&P GSCI Wheat ended the year down 2.7%. Sugar racked up its fourth consecutive year of annual gains, while caffeine fans should be heartened by the fact that coffee was the worst performer in the S&P GSCI in 2022, falling 21.9%.

With the USD posting its biggest annual gain since 2015 and interest rates rising, it was no surprise that the yellow metal had a lackluster year. The S&P GSCI Gold ended 2022 down a little less than 1.0%. That said, gold performed admirably in the final few months of the year on expectations that the U.S. Fed could begin to scale back the pace of its interest rate hikes, strong central bank purchases and the ongoing challenges in the cryptocurrency ecosystem.

The S&P GSCI Livestock eked out a gain of 4.8% in 2022. Lean hogs were the best performer, benefitting from tight supplies and less competition from poultry.

To learn more about the S&P GSCI and related indices, check out our Commodities Theme Page.

How does constructing high capacity indices focusing on stable dividend growers and excluding potential value traps, tend to lead to higher profitability, reduced volatility, and greater risk-adjusted performance than the benchmark? S&P DJI’s Pavel Vaynshtok, Vanguard’s Janel Jackson, and MJP Wealth Advisors’ Brian Vendig take a closer look at the S&P Dividend Grower Indices.

With less than two weeks remaining in 2022, the S&P/TSX Composite Index is down 5.7% YTD (a relatively mild decline compared to the S&P 500^®’s 17.9% drop). The S&P/TSX Composite Low Volatility Index has underperformed, which is unusual for a down year, falling by 9.6% YTD.

Volatility continued its uptrend since the last rebalance, rising for every sector of the S&P/TSX Composite Index. Materials and Utilities were among the sectors with the biggest hike in one-year volatility, up 5% and 4%, respectively.

Not surprisingly, the latest rebalance for the S&P/TSX Composite Low Volatility Index scaled back its weight in Utilities. (The index has had zero weight in Materials since its December 2021 rebalance.) Real Estate also pared its weight, while the remaining sectors all increased their presence, with Industrials taking up most of the slack. The latest rebalance took effect at the close of trading on Dec. 16, 2022.

As we reflect on this year’s notable market themes, one trend is certain: it has been a tumultuous market characterized by rate hikes and inflation concerns across regions, with significant losses across asset classes. Crypto market performance added to jitters, with the S&P Cryptocurrency LargeCap Index down 66% YTD. Losses throughout the year culminated in the collapse of FTX, one of the largest global cryptocurrency exchanges, as a result of its founder’s recent fraud allegations. A turnaround in broad market equities that began in October provided much-needed relief, with easing inflation and optimism surrounding a potential slowing pace of U.S. rate hikes, but the S&P 500^® has still declined by 15% YTD.

Meanwhile, U.S. Treasuries are on track for their worst year on record, with the S&P U.S. Treasury Bond Index down 9%. As a result, correlations between U.S. equities and bonds turned positive, which last occurred during the second quarter of 2021, as Exhibit 1 illustrates. Corporates and high yield bonds also suffered, with the iBoxx USD Liquid Investment Grade Index and iBoxx USD Liquid High Yield Index down 15% and 8%, respectively. The combined underperformance of equities and bonds meant record losses for the traditional 60/40 portfolio. Other regions were not spared, and the U.K. bond market downturn taught us the importance of liquidity, which can be hard to find when it most needed. Another consequence of rising rates along with safe-haven demand globally was the rally in the U.S. dollar.

Investors’ search for income led to renewed interest in dividend and low volatility strategies, with the S&P 500 Low Volatility High Dividend Index significantly outperforming the benchmark. Additional safe harbors came from value strategies, which have outperformed growth in the U.S. and globally after decades of underperformance. After years of mega-cap dominance, further reversals came with the strength of smaller caps, boosting the performance of S&P 500 Equal Weight Index.

Emerging market equities offered little solace, with the S&P Emerging BMI down 17% YTD, although a rebound in the final quarter was aided by optimism in the U.S., a pullback in the dollar and especially the rebound in China equities as a result of the potential move away from strict pandemic policies. The swings in Chinese equity performance make their diversification properties interesting to analyze. In Exhibit 2, we calculate the spread in trailing 12-month volatility between the S&P Emerging BMI versus S&P Emerging Ex-China BMI. When this spread is positive, the inclusion of the country increases volatility in the benchmark; when negative, the country acts as a diversifier. Note the positive spread for China since March 2021, highlighting China’s switch from a volatility diversifier to a volatility amplifier, as the country’s fortunes have increasingly been tied to the rest of the emerging markets.

Unsurprisingly, as macro headwinds whipsawed markets, volatility rose.  Index dispersion remained elevated, potentially leading to relatively better U.S. large-cap fund outperformance in the first half of the year by creating greater opportunities to add value from stock selection. Volatility also manifested itself in the rising differences among global sectors and countries that we see in Exhibit 3, which implies greater potential opportunities to add value from sector and country allocation. The S&P Global 1200 Energy led among sectors with a YTD gain of 46%, driven by the surge in oil prices from supply shocks, including the Russia-Ukraine conflict and companies’ increased willingness to participate in the energy transition. In contrast to China, Energy, despite being the most volatile sector, has acted as a volatility diversifier.

As uncertainty over the future global economic outlook lingers, with concerns around Q4 corporate earnings, a record inversion between 2- and 10-year Treasury yields, alongside a backdrop of geopolitical tensions, forecasting the market outcome for 2023 may be a futile exercise. But a couple of silver linings are worth noting: the torrid losses in fixed income have made bonds more attractive with relatively high current yields, particularly in the emerging markets and high yield space. As far as equities are concerned, U.S. history might offer a glimmer of hope, with Exhibit 4 showing that since 1936, of the nine prior years with double-digit losses, seven of those years experienced double-digit gains the following year, proof that the best guess of future returns does not depend on the immediate past.