A Bad Year
There is no way around it: 2022 was a bad year for investors. Almost precisely as we entered the new year, the near zero interest rates, friendly fiscal and monetary positioning, and rampant speculation that drove post-COVID gains, quickly gave way to record inflation, ravaged supply chains, and a rapid tightening of financial conditions.
If the massive returns and general investment euphoria of 2020 and 2021 was a long night out with friends, 2022 was the hangover.
Equities finished with their worst year since the Great Financial Crisis, while fixed income, the normally stable ballast of a balanced portfolio, finished with one of its worst years of all time.
Inflation touched north of 9% as the average price of a gallon of gas surged above $5, the highest on recent government record.
Supply chain snarls also led to a rapid increase in the price of consumer goods. Store shelves were often found empty, while many used cars sold for higher prices than new cars, because there were few new cars available to buy.
Meanwhile, the personal income necessary to buy a median priced home in the United States doubled to over $100,000, as a combination of surging mortgage rates and higher home prices sent the cost of owning a house to dizzying heights.
The financial darlings of 2021: meme stocks, SPACs, cryptocurrencies, and NFTs each blew-up in their own unique, or rather, “non-fungible,” way, unveiling perhaps the biggest industry villain since Bernie Madoff.
BUT taking a giant, deep breath and an even bigger step back… things could be looking up.
Light on the Horizon
Even with the painful pullback of 2022, equities entered the year more than 70% above COVID lows and at a level that was a record high less than two years ago.
Additionally, the drop in stock prices has outpaced the drop in business earnings thus far. This has allowed valuation metrics, such as the price-to-earnings ratio (PE), which was stretched coming into 2022, to fall back toward historical averages.
In fixed income, the rise in interest rates has given us, for the first time in recent history, a respectable yield on fixed income investments. Government backed investments that were earning next to nothing entering the year now offer, effectively, risk-free returns in the high 3% to high 4% range, depending on maturity.
With all of this, expert estimates of forward-looking returns for diversified portfolios are higher now than they were as we entered 2022.
Furthermore, many of the economic conditions that have plagued us in the past year appear to be headed in the right direction.
Inflation, while more enduring than most experts initially thought, has shown signs of abating since reaching June highs. Additionally, the massive monetary tightening used by the Federal Reserve to fight this inflation looks to be nearing a pause in early 2023, while the market is already beginning to anticipate loosening in the back half of the new year.
Recession risk remain high, but a full-blown economic downturn is far from a foregone conclusion. Many remain hopeful that the Fed’s objective of a “soft landing,” in which conditions cool down the economy without sending us into a recession, is still in reach.
Where Do We Go From Here?
Market volatility is often referred to as the price of admission to financial markets. Historically, markets have rewarded patient investors; however, as with most things, long-term success rarely comes without short-term pain and struggle.
Because of this, one of the most important decisions an investor makes is not when to buy, but when to resist the urge to sell. We stand by our evergreen advice to stay the course, now and always. Historically, investors who have stuck to that long term mindset have been rewarded.