SIFMA Insights recently published our annual Market Structure Compendium. In this report, we recap last year’s market metrics for volatility, stock market performance, equity volumes, off-exchange trading levels, ETF volumes, multi-listed options volumes, and capital formation trends. We also highlight key themes seen last year across each of these segments. We complete the report with a survey of our equity markets and listed options trading committees, as well as representatives of U.S. equity and multi-listed options exchanges. We questioned survey respondents about where they saw 2023 market metrics heading, as well as their views on retail investor participation.

In this post, we set the scene for recent market performance and then walk through the top 10 takeaways from the report.

Setting the Scene

The post-COVID years produced golden years for capital markets. The long-running 0% interest rate environment allowed all assets to increase in value, even risk assets of all types. In equities, IPOs exploded – issuance was up +75% from 2020 versus 2019 and then another +80% from 2021 versus 2020. IPOs totaled $85.4 billion in 2020 and $153.6 billion in 2021, +86% and +234% to the three-year pre-COVID average of $46.0 billion. This boom in issuance occurred even if some of these companies should not have IPOd at the values they did. This was evidenced by some stock prices declining around 60% after the first earnings call for these newly public companies.

What a difference a year makes. Last year we saw a complete reversal, with some capital markets businesses down around 90%. Issuance essentially shut down. IPOs closed out the year at $8.5 billion in deal value, versus $153.6 billion the prior year, -94.4%. SPACs have all but disappeared at $13.1 billion versus $162.4 the prior year, -91.9%.

Markets began transitioning. The move away from 0% interest rates was well underway, as the Fed continued to raise the Fed Funds rate. The Fed raised this rate seven times last year for a total of 425 bps, an unprecedented rate of increases. This was followed by another 25 bps hike at the January meeting, bringing the range to 4.50%-4.75%. This in turn caused a revaluation of financial assets, and, with the end game uncertain, market participants were asking what should be the intrinsic value of many assets.

As such, on average, markets were on a downward trend throughout last year. The average price for the S&P 500 index in 2022 was 4,098.51, -4.1% to the prior year’s average. From the start of the year to the end, or from January 3 to December 30, the S&P 500 dropped 20.0%, its worst year since 2008 (the global financial crisis, -37.6%). Looking back to 2000, the only other year posting a greater decline was 2002 (the dotcom bubble crash, -23.8%).

So what does 2023 hold for capital markets? Many economists and market participants expect the U.S. to enter a recession this year – a mild one – and the debate continues as to whether or not this is appropriately baked into markets. The 10-year Treasury peaked at 4.2340 in October of last year. By the second week of November, it came down below 4.0000, averaging 3.6776 from that point to the end of the year. (The 10-year has averaged 3.5366 YTD at the writing of this report.) Market participants expect the Fed to continue hiking rates, and it appears a 5.00 rate is baked into markets.

However, the dot plot – FOMC participants’ assessments of appropriate monetary policy, showing the midpoint of target range for the Fed Funds rate – in the December 2022 Summary of Economic Projects showed a step up to higher rates. In December 2022, 55.6% of participants responded a 5.00-5.25 rate would be appropriate for 2023, with another 22.2% of participants selecting 5.25-5.50 and 11.1% of participants responding 5.50-5.75. In September, the results for the appropriate rate for 2023 were 31.6% each for 4.25-4.50, 4.50-4.75, and 4.75-5.00. This increase in Fed expectations is coupled with strong rhetoric from multiple Fed officials that they would continue on with their inflation flight. This makes some market participants wonder if markets have priced in a high enough terminal interest rate.

People can argue whether or not the U.S. is in an economic recession – the difficulty of calling a recession when the labor market remains strong. This is an area of concern for the Fed, as they’re trying to cool the economy while the employment situation remains hot. And this trend is continuing in 2023. For example, the January jobs report showed nonfarm payrolls increased by 517,000, much greater than the 187,000 market estimate. The unemployment rate fell – yes, fell, when the Fed is trying to move this statistic in the upward direction – to 3.4% versus the estimate for 3.6%, the lowest jobless level since May 1969.

Yet, an area that already feels like a recession is in financial assets highly impacted by increasing rates, i.e. stocks. We are in an asset price recession of sorts for some market segments.

As such, market participants are spending time trying figure out what the new normal will be. Meanwhile, traders and investors remain nervous about how to navigate markets over the next few months, or where to put their money to work. In 2023, if the economy gets on a better path and inflation comes under better control – perhaps by the second half of 2023 – markets could settle into their new normal phase.

Before going into more details on market metrics, we first compare 2022 to 2021 results:

The Top 10 Takeaways

Without further ado, we highlight the top ten takeaways from our Market Structure Compendium:

Market Performance (Price)

#1. All four major indexes were negative for the year. The S&P 500 was 4,098.51 on average for the year, -4.1% Y/Y. The Dow Jones Industrial Average was 32,897.35, -3.4%. The Nasdaq was 12,231.35, -14.9%. And the Russell 2000 was 1,884.50, -16.0%.

Volatility (the VIX)

#2. The VIX averaged 25.63 for the year, +30.4% Y/Y. It had a peak of 36.45 and a trough of 16.60.

Volumes (ADV)

#3. Equities averaged 11.9 billion shares, +4.1% Y/Y, with ETFs representing 2.6 billion of these shares on average, +54.6% Y/Y. Off-exchange trading averaged 41.9% of total equity volumes, -1.7 pps Y/Y.

#4. Listed Options averaged 40.5 million contracts, +4.8% Y/Y.

Capital Formation

#5. Total equity issuance, excluding SPACs, was $99.4 billion, -77.2% Y/Y. Of this, secondaries were $78.5 billion, -65.0% Y/Y, and preferreds were $12.4 billion, -78.7% Y/Y. The final segment, IPOs, were $8.5 billion, -94.4% Y/Y.

#6. SPACs closed the year down significantly as well at $13.1 billion, -91.9% Y/Y.

Market Structure Survey

Survey respondents were asked for their expectations for market metrics for 2023.

#7. Market Performance: The majority of respondents expected the S&P 500 to decline somewhat further at 51.2% of responses.    The top three risks stated for both the upside and downside included inflation, monetary policy, and geopolitical events.

#8. Volatility: The majority of respondents expected the VIX to be in the 20-25 range, at 53.7% of responses.

#9. Volumes: The majority of respondents expected equity ADV to be in the 10-15 billion shares range, at 63.4% of responses. For multi-listed options volumes, respondents expected the range to be 30-40 million contracts, at 51.2% of responses.

#10. Retail Participation: For equities, 61.5% of survey respondents estimated retail to represent 20-30% of total volumes, noting this could decrease somewhat going forward (50.0% of respondents). On the options side, 48.6% of estimates were for the same level, 20-30%, expecting this to remain about the same going forward (35.9% of respondents).

—

Katie Kolchin, CFA, Managing Director, Head of Research

Related Resources

• Research

  Market Structure Compendium

• The SIFMA Podcast

  Digging into the SIFMA Insights Market Structure Compendium

  In this podcast, SIFMA's Ken Bentsen and Katie Kolchin dig into the findings and highlights from SIFMA Insights' Market Structure Compendium.