Markets are limping into the new year.

Holiday trading conditions mean liquidity is thin and volumes low, with little by way of events on the global economic calendar of the final week of 2022 that could trigger a major market move:

Monday, December 26

• JPY: BoJ Governor Haruhiko Kuroda's speech

• US, UK, and European markets closed

Tuesday, December 27

• CNH: China's November industrial profits

• JPY: Japan November retail sales, the jobless rate

• UK markets closed

Wednesday, December 28

• JPY: Bank of Japan summary of opinions, Japan November industrial production

Thursday, December 29

• EUR: ECB releases Economic Bulletin

• USD: US weekly initial jobless claims

Friday, December 30

• US bond market closes early

Amid the lull, astute traders and investors are already sharpening their outlooks for 2023.

But before we consider the year ahead, let’s take a brief moment to reflect on the (tumultuous) year gone by:
 

2022 defined by Fed rate hikes

The primary driver of global financial markets in 2022 has been the Fed’s aggressive battle against inflation.

When stocks peaked on Wall Street on January 3^rd, markets thought that the upper bound of the Fed’s policy rate of 0.25% would rise by just 0.75% by the end of this year. It now stands at 4.5% with the latest Fed dot plot predicting a peak rate of 5.1% in 2023.

The series of jumbo-sized rate hikes this year has left the US benchmark S&P 500 in and out of “bear market” territory – that is one defined as a decline of 20% or more – on several occasions.

At the point of writing, the S&P 500’s year-to-date performance stands at negative 19.33%, though futures are pointing to a positive open when US markets reopen after the long Christmas weekend.

To be clear, this benchmark stock index remains more than 10% above its mid-October low in sub-3500 domain.

Yet what’s striking for equity bulls is how it has stubbornly adhered to the series of lower highs and lower lows (downtrends) for all of 2022. After all, the Fed rate hikes of this year have invoked plenty of fear across a plethora of asset classes.

This now brings us to 2023.

Arguably, the primary concern shaping markets for the upcoming year is the prospect of a US recession, due in part to the Fed rate hikes this year.

A contraction in the world’s largest economy, which then deals a direct hit to the earnings of publicly-listed US companies, may spell further declines for US stocks.

Still, there are a couple of reasons, one’s short-term and the other requires a historical view, that the worst may be over for the S&P 500:

1. Short-term: The S&P 500 is on course for a bullish cross, with its 50-day simple moving average (SMA) set to cross above its 100-day counterpart.
   Such a technical event may spell more immediate gains.
    
2. Historically speaking, since 1928, the S&P 500 has only suffered four episodes of back-to-back annual declines (calendar years with annual declines for the S&P 500 have been put into brackets):
   • The Great Depression (1929-1932)
   • World War II (1939-1941)
   • 1970s Oil crisis (1973-1974)
   • Dot-com bubble (2000-2002)

Given that 2023 doesn’t yet point to a crisis that has the same magnitude as the monumental events listed above, it portends to a year of recovery for US stocks.

However, 12 months is certainly a long time for global markets.

Only time will tell whether stock bulls will be having their time in the sun this time next year.

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