2022 has certainly been an eventful one in the world of finance with traders bearing the brunt of tumultuous market conditions amidst a flurry of indifference. As the year draws to a close, however, there is light at the end of the tunnel – if previous December figures are anything to go by.

December is traditionally very strong for the markets, largely due to holiday spending that drives returns. With that being said, inflation and interest rates are the two significant market catalysts that have weighed on stocks all through 2022 – and will undoubtedly have a part to play as the year draws to a close.

To add some context to the markets, the S&P 500 Index lost over 15% year-to-date while the Nasdaq Composite Index (US100) plummeted by over 27% in the same period. In addition, the Dow Jones Industrial Average index (US30) dropped about 6% at around the same time.

The main contributing factor to these turbulent market conditions was multi-decade-high inflation that cornered the US Fed – leading to the end of its highly-successful monetary policy with the implementation of an aggressive rate hike. In addition, the conflict in Ukraine ramped up pressure on the markets as commodity and energy prices soared.

Essentially, interest rates that were ranging from 0% to 0.25% in March 2022 jumped exponentially from 3.75% to 4% by November 2022. While October 2022 appeared to be the height of the current bear market, it remains to be seen whether December will add to the bear market in more ways than imaginable.

With 2022 markets down by almost 16%, let’s look at what we can expect for the tail end of 2022 and early 2023.

The Federal Reserve’s Market Influence

Considering how the Federal Reserve has influenced the markets for the better part of 2022, it appears likely that their contribution to the market heading into 2023 will be significant. This is mainly due to their objective of reducing inflation by bumping up the Federal Funds rate.

Increasing the Federal Funds rate means the cost of borrowing money will also increase – something that influences liquidity in the economy as well as the price of stocks. Stock prices, especially risky growth stocks, are most vulnerable as their prices will likely fall when these rates increase.

What traders will be most interested in is whether the Federal Reserve continues to increase interest rates in 2023 at the same pace that it did in 2022.

The effect of inflation on retailers

It is anticipated that inflation will sting consumer-facing retailers as customers will be more conscious about their spending habits, and therefore more cautious with parting with their hard-earned money. It is normally the case that when there are financial constraints, luxuries are cut from the budget first while necessities like staple food, medication, and rent are prioritised.

With that being said, retailers – especially those who deal in luxurious items – may suffer a dip in holiday sales, subsequently affecting the markets. From an investor’s point of view, it makes perfect sense to continue buying shares of all-weather businesses that offer products that people consider necessary – regardless of what the market conditions are like.

Low-cost retailers may also benefit from this as consumers may opt for cheaper retailers during their holiday spending spree in an attempt to stretch their budgets. Overall, traders will do well to stay away from high-end retailers and those who deal in luxury items.

China’s Influence on the Markets

It’s no secret that China is a major player in the global economy and any factor that affects its economic output will have a domino effect on the markets around the world. With China implementing stringent COVID policies in the wake of the latest outbreak, temporarily closed factories and disruptions at the workplace are certain to have a ripple effect on the markets.

Many of these closed factories are tasked with making high-end products for renown international brands – like Apple – and these disruptions will affect both sales and investors’ sentiment going into 2023. Traders should consider investing in organisations that are less reliant on Chinese companies as it is unclear as to how long, and to what extent, the Chinese authorities will drive their zero-COVID policy.

Final thoughts

It is clear that many variables come into play that can affect the markets as we close 2022 and head in 2023. Besides the ones mentioned above, traders must be aware of the market environment and act swiftly to mitigate devastating losses.

As reported by MarketWatch.com, the World Gold Council offers a positive market outlook for 2023, Wynn Macau is optimistic about the Chinese economy reopening soon, and Google is merging the Maps feature to cut costs – news that traders can absorb when considering their investments.

In addition, Moneycontrol.com advises of an exciting BP expansion and increased Apollo Tyre investments – something that investors will consider when looking at where to commit their funds.

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