The almost 6% decline in December resulted in the FT Wilshire 5000 registering a decline of -19% for 2022. This constitutes the fourth largest annual drawdown since the inception of the index in 1970.
Markets and risk aversion responded to a perfect storm of war (Ukraine), inflation, real income and supply chain shocks and a rapid rotation to restrictive financial conditions just as economies were recovering from the COVID impact - all making 2022 an annus horribilis.
Exhibit 1: Largest Calendar year drawdowns for the FT Wilshire 5000
Source: Wilshire and Refinitiv. Data as of December 31. 2022
A lack of diversification opportunities
What made 2022 particularly difficult was the lack of diversification opportunities. For example, Exhibit 2 shows that 2022 was the first time in 40 years that both bonds and equities delivered simultaneous negative returns.
Exhibit 2: Simultaneous decline in US equity and bond returns
Source: Wilshire and Refinitiv. Data as of December 31. 2022
Two sectors contributed almost half of the aggregate decline in US equities
Exhibit 3 shows the ranked FT Wilshire 5000 sector-weighted performance contributions for 2022. Almost half of the aggregate decline in the FT Wilshire 5000 is accounted for by the scale of negative contributions delivered by the Digital Information and Technology sectors.
Exhibit 3: Sector weighted contributions for the FT Wilshire 5000 in 2022
Source: Wilshire. Data as of December 31, 2022
The other key market dynamic was the rotation away from Growth towards Value style
Exhibit 4 depicts the -25.1% underperformance of the Growth style relative to Value in 2022. This has effectively unwound the rotation to Growth that occurred during the immediate aftermath of the COVID pandemic.
An important driver of underperformance of the Growth style was the negative valuation impact of rising real yields in 2022.
Exhibit 4: Growth Style performance relative to Value Style
Source: Wilshire. Data as of December 31. 2022
Exhibit 5 examines the sector-weighted contributions for both the Growth and Value style indices. Value benefitted from a larger positive contribution from the energy sector compared to the Growth Style. It also benefitted from not incurring the scale of negative contributions in the digital information, technology, and consumer goods sectors.
Exhibit 5: Comparing the sector weighted contributions for the Growth and Value Style indices
Source: Wilshire. Data as of December 31. 2022
2022 saw an improvement in performance dispersion
Comparing the performance of the top 10 stocks by market cap (equally weighted) to the performance of the median stock in the FT Wilshire 5000 index is a useful gauge of performance dispersion. Exhibit 6 shows the scale of reversal in dispersion from 2021 to 2022. In 2021, median stock performance significantly lagged the return delivered by the top 10 stocks (negative dispersion). 2022 saw the median stock outperform delivering an improvement in dispersion characteristics.
Exhibit 6: Comparing the performance of the top 10 stocks to the median stock
Source: Wilshire. Data as of December 31. 2022
MM-333333 E0623
