What’s driving markets

U.S. stocks were trading down Friday afternoon, on pace to close out the last trading session of 2022 with weekly and monthly losses.

Stocks and bonds have been crushed this year as the Federal Reserve raised its benchmark interest rate more aggressively than many had expected as it sought to crush the worst inflation in four decades. The S&P 500 index is on track to end the year with a loss of roughly 20%, its worst annual performance since 2008.

“Investors have been on edge,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, in a phone interview Friday. “It seems as though the ability to drive down prices is probably a bit easier given just how crummy the year’s been.”

Stock indexes have slumped in recent weeks as the latest rally inspired by hopes for a Fed policy pivot wilted in December after the central bank signaled that it would likely wait until 2024 to cut interest rates.

On the final day of the trading year, markets were also being hit by selling to lock in losses that can be written off of tax bills, a practice known as tax-loss harvesting, according to Kim Forrest, chief investment officer at Bokeh Capital Partners.

An uncertain outlook for 2023 was also taking its toll, as investors fretted about the strength of corporate profits, the economy and the U.S. consumer with fourth-quarter earnings season looming early next year, Forrest added.

“I think the Fed, and then earnings in the middle of January — those are going to set the tone for the next six months. Until then, it’s anybody’s guess,” she added.

The U.S. central bank has raised its benchmark rate by more than four percentage points since the beginning of the year, driving borrowing costs to their highest levels since 2007.

The timing of the Fed’s first interest rate cut will likely have a major impact on markets, according to Forrest, but the outlook remains uncertain, even as the Fed has tried to signal that it plans to keep rates higher for longer.

On the economic data front, the Chicago PMI for December, the last major data release of the year, came in stronger than expected, climbing to 44.9 from 37.2 a month prior. Readings below 50 indicate contraction territory.

Next year, “we’re more likely to shift towards fears around economic growth as opposed to inflation,” said Heppenstall. “I think the decline in growth will eventually lead to a more meaningful decline in inflation.”

Read: Stock-market investors face 3 recession scenarios in 2023

Eric Sterner, CIO of Apollon Wealth Management, said in a phone interview Friday that he’s expecting the U.S. could fall into a recession next year and that the stock market could see a new bottom as companies potentially revise their earnings lower. “I think earnings expectations for 2023 are still too high,” he said.

The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite were all on pace Friday afternoon to book weekly losses of around around 1%, according to FactSet data, at last check. For the month, the Dow was heading for a decline of almost 5%, while the S&P 500 was on track to drop almost 7% and the Nasdaq was set to potentially tumble almost 10%.

Read: Value stocks trounce growth equities in 2022 by historically wide margin

As for bonds, Treasury yields rose on Friday as the U.S. sovereign debt market was set to record its worst year since at least the 1970s.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.879%
was up about four basis points Friday at 3.88%, according to FactSet data, at last check. Ten-year yields have jumped about 2.34 percentage points this year through Thursday, on track for the largest annual gain on record based on data going back to 1977, according to Dow Jones Market Data.

Meanwhile, the yield on the 2-year note
TMUBMUSD02Y,
4.423%
has soared about 3.64 percentage points in 2022 through Thursday to 4.368%, and the 30-year yield
TMUBMUSD30Y,
3.971%
jumped 2.03 percentage points over the same period to 3.922%. That marked the largest calendar-year increases for each on record based on data going back to 1973, according to Dow Jones Market Data.

Outside the U.S., European stocks capped off their biggest percentage drop for a calendar year since 2018, with the Stoxx Europe 600
SXXP,
-1.27%,
an index of euro-denominated shares, falling 12.9%, according to Dow Jones Market Data.

Read: Slumping U.S. stock market lags these international ETFs as 2022 comes to an end

Companies in focus

• Tesla Inc. 
  TSLA,
  +0.46%
  shares were down 0.4% after their worst run of losses in more than four years.

• Southwest Airlines 
  LUV,
  +0.61%
  shares were trading about flat even as the company said it expected its holiday travel fiasco to impact fourth-quarter profits.

• Las Vegas Sands Corp. 
  LVS,
  +1.86%
  was among the best performers in the S&P 500 index on Friday, with its shares up 1.2%, as it confirmed renewed gaming concessions in Macau.

—Steve Goldstein contributed to this article.