When writing this letter in previous years, we came up with a word to best describe the events of each year. In 2020 that word was “grit”. Having the “grit” to get through a very rough year by focusing on the passion, resiliency, perseverance, conscientiousness, and courage needed to take on future events. The word for 2021 was “progress”. We remained hopeful for a brighter future and continued to be resilient in adapting to changing conditions. We are making progress, progress towards a better future. Well, the word for 2022 going into 2023 is “reset”. With a market and economic cycles reset, there will likely be higher highs ahead.
Characterizing this past year
Some of the words that our group came up with to describe the events of 2022 included the following:
- Determination – the ability to continue trying to do something, although it is very difficult
- Resolve - to solve or end a problem or difficulty
- Courage – the ability to control your fear in a dangerous or difficult situation
- Transformative – causing a major change to something or someone, especially in a way that makes it better
- Trust – to believe that someone is good and honest and will not harm you, or that something is safe and reliable
- Confidence – the quality of being certain of your abilities or having trust in people, plans, or the future
- Challenging – difficult, in a way that tests your ability or determination
- Frustrating – making you feel annoyed or less confident because you cannot achieve what you want
- Gloomy – not expecting or believing anything good in a situation
- Unpredictable – likely to change suddenly and without reason and therefore not able to be predicted or depended on
- Unforeseeable – an event that cannot be known about or guessed before it happens
- Déjà vu – the strange feeling that in some way you have already experienced what is happening now
- Inflationary – causing price increases and inflation
- Reversal – a problem or failure
The word that we ultimately decided to use to describe 2022 is “reset”.
‘Reset’ – to change, to be at a different level or time
Learnings from this past year
2022 was a challenging year filled with major macro economic issues that resulted in poor performance. Some of the macro events include a bear market in the stock market, higher than normal inflation, rising interest rates, and war.
Until 2022, there had not been a year in recorded history where both the stock market and the bond market had ended a calendar year with negative returns. The fact that both asset classes had a negative calendar year was both unpredictable and unforeseeable. Many of the research reports going into 2022 were optimistic, leaving investors frustrated with the actual results of the calendar year. The S&P500 started 2022 at 4,778 points, up 26% over the previous calendar year. The same market would close around 3855 points, down -19%. At one point, the S&P500 was down -27.5% from its highest point in January of 2022. This is a reversal pattern and one that would leave many feeling gloomy and frustrated.
Much of the economic activities globally have been focused on dealing with a higher-than-normal inflationary period. The general cost of goods has increased dramatically and the reason for those inflationary prices can be attributed to a few macro-economic events. The first being a general supply and demand imbalance that resulted from production issues coming out of COVID. The second being war, the invasion of Ukraine by Russia and the economic consequences of that.
Interest rate hikes have been implemented to fight these higher-than-normal inflation numbers, shrinking the money supply globally. Monetary policy measures from central banks have led to higher interest rates to slow down spending with the goal of ultimately reducing inflation. The tightening of the money supply has left many investors feeling gloomy about the results of this past year. Higher interest rates have directly impacted the price of bonds during a period when the stock market is also contracting. A reversal of what was being felt in 2021 when things felt like they were getting economically better as we were coming out of the impact of COVID over the past few calendar years.
Where do we go from here?
There have been many different market cycles over the years, each showing lots of evidence as to what happens after a bear market. The normal business cycle is a period of expansion, a peak (high point), a period of contraction, and a trough (low point). After each of these cycles there is a reset point, and a new period of expansion begins. The evidence shows us that the best time to be invested, or investing, is after a trough. The problem is that nobody knows exactly when that point will be. The game plan in dealing with an economic contraction and what to do is as follows: stay invested!
Staying invested requires determination and faith that in doing so you will be rewarded at some point in the future. Nobody ever said that investing was easy, but it can be straight forward if you have the determination and courage to weather the storms. Trying to time market movements has been proven to be futile, staying invested has been rewarded. The last major bear market occurred during the Global Financial Crisis. At that time the S&P500 hit a low of 666.79 points in March of 2009. Someone who had stayed invested to today would have experienced an increase of 478% in that same market even at today’s prices that have sold off from the highs in January of 2022.
Staying invested requires a sense of trust, trust that you are invested in the right securities and that by staying invested you will be rewarded in the long-term. During historical market cycles the periods of time with the highest returns are when things felt the worst. A transformative change of events happens and is only recognized after the fact. It is only obvious after it occurs, after a reset occurs.
Staying invested requires having confidence in your plan and the professionals that you are working with. Having a well constructed financial plan gives you the roadmap to getting through market and economic cycles. Often quoted are the annual rates of return of various markets, they are given as one number. For example, the S&P500 has been in existence since 1957. Since then, the market has returned on average over 11% per calendar year. However, this is not a straight line, there are many different market cycles during that period including 14 separate bear markets. As a matter of fact, the S&P500 has never returned exactly 11% in any calendar year, this is a long-term average return. Your plan should be constructed to withstand not just the bear market of 2022 but future bear markets to come.
Investors are rewarded for having the confidence, trust, determination, courage and resolve to stay invested during many different market cycles. Focusing on the long run, not the short run, provides us with the ability to participate in the next reset and the ones that will come after that.
Investors can feel a lot of pain if they instead focus on the news of the day, treating each day’s events as triggers to make changes. We would counsel those who are feeling frustrated, finding it challenging to stay invested, experiencing gloom and dread to reach out. Talking through these real feelings and focusing back on the longer plan helps us all make better decisions.
Wishing all of you a happy, healthy and prosperous 2023!
The CM Group