December was another challenging month for equity markets with the S&P 500 declining by 5.90%. Nevertheless, Q4 produced a nice gain of 7.08% resulting in year to date 2022 returns of -19.44%. This was the worst calendar year return since 2008. Fourth quarter returns were buoyed by headline inflation numbers which were tame enough to lead investors to believe the worst may be in the rear view mirror. In turn, investors believed that going forward, the Fed would be less aggressive with rate hikes as witnessed by the Fed’s final rate hike of the year being reduced from 75 basis points to 50 basis points. That said, there was some disappointment in the Fed’s guidance for its target Fed Funds rate coming in higher than expected which dampened December returns. On another note, strong corporate earnings in certain sectors provided a tailwind for stocks during the quarter. Fixed income returns for the quarter were mixed with corporate bonds outperforming government bonds. This was primarily due to a narrowing in credit spreads.
Geopolitical risk continued to weigh on investors minds as witnessed by events such as the change in UK leadership. Former UK Prime Minister, Liz Truss proposed major spending and tax cuts which resulted in market turmoil. Truss ended up resigning on October 20th and her replacement, Rishi Sunak performed a quick about face resulting in restored market confidence. In the fourth quarter energy stocks were buoyed by the post-Covid reopening in China. The perception of an increase in demand, resulted in the energy sector outperforming other sectors. Finally, lower perceived risk from the war in Ukraine provided a needed reprieve to war weary investors.
Our models performed quite well during the quarter with our Diversified Portfolio gaining 4.80% bringing year to date returns to 9.72%. As noted above, the S&P 500 gained 7.08% for the quarter but was down 19.44% for the year. We were pleased that our strategy held up so well in the face of a large decline in the markets we trade. Returns were helped in large part by our Hybrid Momentum Model which was up 21.96% for the year. The Counter-Trend model gained 11.74% for the year whereas the Relative Value model was down and detracted from results. Nevertheless, diversification proved beneficial during the quarter and has led to our double-digit gains for the year compared to significant market losses.