“Any new beginning is forged from the shards of the past, not from the abandonment of the past.” – Craig D. Lounsbrough
2022 was a challenging year for investors. Markets fell into bear market territory and experienced the worst annual performance since 2008. The S&P 500, Dow and Nasdaq declined 19.4%, 8.8% and 33.1%, respectively, last year. Interest rates swung wildly with the 10-year Treasury yield jumping from 1.51% at the start of the year to a high of 4.24%, before ending at 3.88%. This mirrored inflation as the Consumer Price Index climbed to a 40-year high of 9.1% in September. As a result, the Fed hiked rates seven consecutive times from 0% last March to 4.25% in December. Along the way, a myriad of other events impacted markets from the war in Ukraine to China’s zero-Covid policy, affecting everything from oil prices to the U.S. dollar.
These market swings can cause whiplash for even the most experienced investors. Much of what drove markets last year was the result of the pandemic and its rapid recovery over the past three years. Like an earthquake that then causes a tsunami, the sudden drop and resurgence in business and consumer demand, fiscal and monetary stimulus, and global supply chain capacity created shock waves across the financial system. While they do cause immediate damage, even the largest shocks eventually settle.
Despite these historic shifts in the economy and markets over the past year, the principles of long-term investing haven’t changed. Staying disciplined, diversified and focused on longer time horizons is more important than ever. For some, it may feel as if markets can’t catch a break, but this is how it felt in March of 2020 before the rapid recovery, in 2008 before a decade-long expansion, and during countless other times across history. Keeping one’s footing as markets rock back and forth is still the best way to achieve financial goals.
Below, we review five insights from the past year that can help investors to maintain a proper long-term perspective in 2023.
1. The historic surge in interest rates impacted both stocks and bonds
- Stocks and bonds have both struggled recently due to rising inflation and interest rates.
- This breaks the historical pattern driven by falling bond yields which supported bond prices.
- Despite this challenging period, investors should continue to focus on diversification as interest rates stabilize.
- The Fed raised rates at a historically fast pace
- The Fed is raising interest rates as it responds to high inflation, especially on food and shelter which affects consumers.
- The market expects the Fed to continue along this path of rate hikes through mid-2023.
- This could keep all interest rates higher in the coming years.
3. Inflation reached 40-year highs but has improved
- CPI is a commonly cited measure of inflation. It uses a basket of goods and services to track price changes for consumers.
- In order to measure the underlying trend in inflation, rather than temporary shocks to food and energy, economists often focus on Core CPI.
- Inflation remains at four-decade highs but price pressures are already cooling.
4. The rallies in tech, growth and pandemic-era stocks have reversed
- Growth stocks have outperformed Value stocks in recent years but this is now reversing.
- This is partly due to tech-led sectors which have changed the landscape of the economy.
- Growth and Value often trade off over the course of years and decades, as seen in the spread over time.
5. History shows that bear markets eventually recover when it’s least expected
- This chart shows bear market pullbacks since World War II. These are 20% or worse drops in the market.
- The average bear market sees the market fall -35.8% from peak to trough, taking about a year and a half.
- Recoveries from these levels usually take 2 years, 5 months. The recovery from the pandemic crash required only about 6 months.
If you want to know if you are setup properly in the upcoming year, please email me at Jeremy@Riverbendwm.com or Click Here to set up a phone appointment.
On the lighter side, some of my goals for 2023 are:
- Hire another administrator for Riverbend.
- Move Riverbend into a larger office.
- Work more closely with CPAs and attorneys to help clients coordinate and be efficient in tax planning, estate planning, asset protection, and charitable giving.
- Lose 15 pounds 😊
What are some of your goals for 2023?
Hope all is well with you and your family,
Finger Financial Five – 5 points in 5 minutes or less – is to provide you with a weekly shot of useful financial information. My intention is to share principles, so that you will have more clarity and peace, that help you make better financial decisions.
Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA Riverbend Wealth Management.
This content is developed from sources believed to be providing accurate information and provided by Riverbend Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.