In reviewing 2022's financial markets performance, many prognosticators are focusing on double-digit losses in equities. Indeed, the IFA U.S. Large Company Index — representing the most widely followed blue chip stocks in the world — plummeted by more than 18% on the year. 

Here's the tricky part, though. In the fourth quarter of a generally disappointing year for investors, equity markets reversed course. That same large company IFA index, for example, gained 7.54% in the final three months of 2022. Those with portfolios tilted to value-styled and small-cap stocks were especially rewarded in Q4.

As you can see from the graphic below, in November the global equity market staged its biggest rally since 2020's run following Covid-19 pandemic fears. The Q4 surge came amid much fanfare and headline exuberance in the news about signs of ebbing inflation and anticipation of a less hawkish U.S. Federal Reserve rate hikes policy. 

Although stocks and bonds gained ground in Q4, history teaches us that trying to time markets based on short-term fluctuations is a fruitless endeavor. Just as 2022 proved, tides can change quickly (and forcefully) in either direction.  

Consider the chart below. It shows the consequences of missing the IFA SP 500 Index's most productive days. For instance, if you missed just the index's five biggest daily advances, your annualized return would've been two percentage points lower. And that's over a 20-year period.

Will such improving Q4 market sentiment hold in a new year? Granted, history can't be relied upon to repeat itself. Still, we've found enough long-term data to gain an objective statistical perspective on just how problematic it can be to successfully trade in and out of markets. A host of decorated academic researchers have reached much the same conclusion. To name just a few, such a list includes Nobel laureates Eugene Fama, Harry Markowitz, William Sharpe and Merton Miller.

Another notable critic of market timing is Princeton University economics professor Burton Malkiel. In the 50th anniversary edition of his classic book "A Random Walk Down Wall Street" (W.W. Norton & Company, 2023), he warns that "we have reviewed centuries of history documenting how the madness of crowds has inflated asset prices and led the unwary to financial ruin." Malkiel adds:

"The clear lesson of history is that eventually all excessively exuberant markets succumb to the laws of gravity. The consistent losers in the market, from my personal experience, are those who are unable to resist being swept up in some kind of tulip-bulb craze ... an investor who simply buys and holds a broad-based portfolio of stocks can make reasonably generous long-run returns. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich speculative binges."

Domestic Equities

IFA benchmarks for U.S. large-cap value stocks led the fourth quarter surge in domestic equities, followed closely by its sister small-cap value index. Although still positive, stocks as represented by the IFA U.S. Small Growth Index were laggards in Q4. At the same time, the IFA index capturing domestic large-cap growth stocks finished slightly negative in the final three months of 2022.

International (Developed) Equities

In Q4, IFA index returns from developed international stock markets landed on strongly positive ground. As in U.S. equity markets, value-styled stocks prevailed in small- and large-cap asset classes. The IFA International Small Cap Value Index returned 19.29%. Right on its tail was the large-cap oriented IFA International Value Index, which finished the fourth quarter with a 19.26% gain. Meanwhile, its sister small-cap blend index produced a 17.61% return. Such performances came after each foreign stock index had recorded more than a 10% drop in the previous quarter.

Real Estate Equities

The case for diversification was made in 2022's final quarter in publicly traded real estate stocks. By estimates of major index results reviewed by Dimensional Fund Advisors, real estate stocks in developed international markets on average outperformed shares of U.S.-based real estate investment trusts (REITs) during Q4. That reversed the previous quarter's results when domestic REITs held up better. In the most recent fourth quarter, the net result was a gain of nearly 7% by the IFA Global REIT Index.

Emerging Markets Equities

Just like in developed foreign markets, emerging markets stocks ran into relatively strong tail winds in Q4. The large-cap oriented IFA Emerging Markets Value Index led the way by gaining 10.27% in the quarter. Its sister index capturing developing market small-cap stocks finished ahead by 10.18%. The worst performer came on the blended large-cap side as the IFA Emerging Markets Index returned 10.07%. All three benchmarks notably rebounded from the previous quarter's negative overall performance.    

Fixed-Income

In the fourth quarter, the 30-year U.S. Treasury rate increased by 0.24% to 3.97%. Meanwhile, the 10-year U.S. Treasury rate rose by 0.21% to 3.88% while the five-year U.S. Treasury rate increased by 0.09% to 3.99%. 

In a period of rising rates, IFA's fixed-income indexes — which cover higher-quality and lower-termed investment-grade bonds — managed to produce positive results in the fourth quarter. During a period in which yield curves remained inverted, the most noticeable movement took place in the IFA One-Year Fixed Income Index, which returned 0.80%. Following closely behind in terms of gains were: the IFA Two-Year Global Fixed Income Index (0.75%), the IFA Five-Year Global Fixed Income Index (0.74%) and the IFA Short-Term Government Index (0.60%). All four indexes in Q4 reversed course from a negative third quarter. 

IFA Index Portfolios

With stocks and bonds both gaining ground, IFA Index Portfolios finished 2022's fourth quarter with positive results. As might be expected, portfolios with heavier weightings to stocks did particuarly well in Q4. For example, notice in the chart below how IFA Index Portfolio 100 (100% stocks) returned 12.14%. At the other end of the spectrum, the bond-heavy IFA Index Portfolio 10 (10% stocks and 90% bonds) also landed in solid positive territory with a return of 1.48% in Q4. (All of the returns of the IFA Index Portfolios shown below are net of the maximum annual 0.90% advisory fee through Dec. 31, 2022.) 

Each quarter, we monitor our recommended funds for clients. As part of that process, we've developed a rating system. For a summary of those results, please feel free to check IFA's Performance Monitoring Report (PMR). 

The wealth of IFA's educational materials are available for Apple iOS and Android devices via the IFA App. This free App is available to download from both the Apple App Store and the Google Play Store for Android.

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Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/