December was neither kind to the markets nor to investors. However, I’m please to say the first week of 2023 appears to be headed in the right direction. I know we’re only one week into the year, and there is still an undercurrent of uncertainty, but I am hopeful the Federal Reserve begins slowing interest rate hikes as we watch inflation trend lower. If the Fed has made one thing clear, it is that it is completely data dependent going forward.
As for 2022, let’s do a quick review. After a banner year in 2021, in which the S&P 500 produced a total return of 29%, everything started to fall apart in early 2022. Supply chain problems from COVID, rising inflation, war in Ukraine, and rising interest rates drove the S&P 500 to a negative total return of 18% last year. Stock prices were hit by declining valuation multiples and companies lowering guidance. Growth led the market in 2021 and got hit hard in 2022. The Nasdaq (QQQ) declined 33% while growth stocks in general, as measured by the iShares Core U.S. Growth ETF (IUSG), was down 29%.
Bonds, a classic safe haven from stocks, failed in 2022 as well. Bonds were hit by rising inflation and rising interest rates, and performed even worse than stocks. The iShares 20+ Year Treasury Bond ETF (TLT) was down 31% including dividends. The iShares Core US Aggregate Bond ETF (AGG) was down 13%. Even REITS, which typically provide a high level of income were hit hard last year due to rising interest rates and lower office occupancy as many workers started working from home during COVID and then refused to return to their office full time. The Vanguard Real Estate ETF (VNQ) had a negative total return of 26%. This is to say, not much did well last year. Except for a few silver linings, i.e. energy, most all asset classes fell.
So, what’s in store for 2023? Putting it bluntly, a recession is now the number one economic concern. When businesses make less money due to lower consumer spending (triggered by dwindling reserves, price pressures, and an aggressive Fed), companies lay off workers and more people are hesitant to spend. Weak expectations or prior over-investing also factor into the equation, with many firms feeling that large swaths of the economy could, or are already, experiencing worsening macro forces and a series of unknown variables. As of now, many companies haven’t slashed their profit forecasts, while hiring remains surprisingly robust and the unemployment rate is sitting near historical lows at 3.5%. Again, the silver lining is if that resilience holds up and inflation continues to cool down, a soft landing could be in the making. The Fed anticipates slowing rate hikes with a terminal rate just above 5%, which could mean that somewhat of a slowdown is in store, but not one that slams the brakes on the economy.
Lastly, I will caution everyone that this time of the year brings out the prognosticators. While they may sound confident in their predictions, understand that none of them have a crystal ball and that among the hundreds (thousands?) of them, at least some will be correct. That doesn’t make them geniuses, as the media likes to pretend, but instead just lucky. Your best bet is to continue to stay invested, to continue to make regular contributions, and to stay properly diversified. No one knows what the future holds, but the research suggests these three factors are the biggest contributors to successful investing in the long run. Let’s hope for a great 2023, while remaining cautiously guarded against the hurdles that inevitably are ahead.
In closing, I came across a bit of trivia this week that I must share. I am reading a fiction book called The Sea of Tranquility by Emily St. John Mandel and in it she mentions the Cincinnati Mercantile Library. Having worked downtown for several decades, I regret often passing by its doors without once going inside. Anyway, in the book the author mentions that the library has a 10,000-year lease which seemed hard to believe. After a little research into the history of the library, it is in fact true. The 183-year old library has a colorful history. The library was opened in 1835 as the Young Men’s Mercantile Library Association. Prospective members had to be young and studying a mercantile trade. In 1845 the building caught fire and while most of the collection was saved, the future of the library was uncertain. Cincinnati College came to the rescue with a $10,000 lease that guaranteed adequate residency on the current site regardless of what buildings were constructed there for the following 10,000 years. In other words, the library was guaranteed space in whatever structure was built on that plot of land for an annual fee of $1 until the year 11845 AD. If you want to learn more about this treasured institution, here is the condensed history of the Mercantile Library. Now you know.Bruce J. Mason, MBA