These Were the Best Trades in 2022

Dow a Dog No More

In most years, a 8.2% drop for the Dow Jones Industrial Average would cause little celebration. But not in 2022. The 30-member gauge has outperformed the 503-member S&P 500 by 10 percentage points this year, the widest performance spread since 1933, data compiled by Bloomberg show.

The 126-year-old index is big on established industrial firms like Boeing Co. and Caterpillar Inc. and has relatively limited exposure to tech giants. That was a winning combination this year, when rising interest rates took the shine out of tech high-flyers by making the present value of future profits less appealing.

A pair-trade strategy of shorting an exchange-traded fund that tracks the Nasdaq 100 Index — known by its QQQ stock symbol —- while buying the Dow would have yielded as much as 35% this year, excluding various costs.

“When people look at what they want to own in a rising rate environment, it’s usually the relatively boring stocks that offer stability and dividends,” said Brent Kochuba, founder of analytic service SpotGamma. “It’s been a year of extreme sector rotations, and the Dow versus the QQQ bet has been a successful trade.”

Bringing Value

Value stocks — those that sell for a low multiple of earnings, sales or corporate net worth — were another area of the market that held up relatively well. While higher interest rates put pressure on expensive technology and consumer discretionary shares, they took a much smaller bite out of cheaper stocks, which tend to offer more near-term cash flows.

While the S&P 500 Value Index is down 5.1% on a total return basis in 2022, it’s still on track for its best year since 2000 relative to its growth counterpart. So, a trade of buying value stocks and shorting growth stocks soared 23% in 2022.

However, the strategy is poised for a breather, according to Morgan Stanley chief US equity strategist Michael Wilson. At this point in the cycle, value shares in the industrial, financial and energy sectors are becoming as vulnerable to an economic slowdown as are high-multiple technology stocks, Wilson said in a Bloomberg TV interview this month.

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