From a financial viewpoint, 2022 was a year where we all suffered, but I sincerely hope your year was better than mine. Although I hit a couple happy milestones this year – I celebrated my 60th birthday as well as the 40th anniversary with my lovely wife – this was also the year that Alzheimer’s took most of my mom’s memory at the young age of 81. I am now just the nice, middle-aged fellow who is somewhat familiar to her. At my birth, she took great pride in picking my name and suffix, Michael Kent Kauffelt, II. (I was named after my dad, but she insisted on no Jr.) These days, she knows me, most of the time, but not the name attached. It is painful, but the longer you live, you learn that life is about accepting the bad with the good and carrying on. None of us is exempt from that. Turning to the financial markets, that lesson applied there too in 2022. Most of you did just that, handling the volatile and painful year in the markets with courage, and then carrying on. Although I spoke with many of you about legitimate concerns and fears, most of you have been through this before in 2008-2009 and, before that, in 2000-2003. Your patience and understanding throughout 2022 was definitely a silver lining.
Now, let’s discuss that pain we felt in the financial markets. For most of 2022, there was no good asset class to own, other than cash. In the US stock market, the S&P 500 Index (large-cap stocks) was down -18.1% in total return for the year. The DJIA (more value-biased and less diversified) was down -6.9%. The NASDAQ Index (technology stocks) was crushed, down -32.5% last year. Unfortunately, bonds were of little help last year to a balanced portfolio. The Fed’s aggressive tightening to rein in inflation had most major bond categories nearly as negative as stocks. The 10-year US Treasury bond was down -16.2% last year. The US Aggregate Bond Index (Treasury and corporate bonds) was down -13.0%. Tax-free municipal bonds were down -8.5% on the year. That sums up the traditional asset categories. If you were invested in more aggressive, non-traditional asset categories (like crypto or ARKK investments), you could have lost 60% or more of your investment in 2022. One silver lining is that most of our clients are retired savers. By the end of the year, we were able to get CDs and other safe bond investments that paid north of four percent. After many years of basically earning zero on money markets and short-term fixed income, the increase in safer yields was a nice option to have.
So, are there any silver linings for 2023? Yes, there are a couple, but they may take a while to kick in, so do not expect the markets to turn on a dime. First, the good news. The markets are somewhat more rational now. Money is not free. Money pays a positive rate of return; car loans are not zero and mortgages are not below 3%. For most of my investment career, starting in 1984, everything cost something. In the words of Milton Friedman, “There is no such thing as a free lunch.” Investors, businesses and consumers make wiser choices when those choices have costs. It was somewhat encouraging to me that the DJIA was only down -6.9%. To me it reflected the benefits of investors buying safer, bigger, dividend-paying stocks. They were doing so because the alternatives, which had looked great when interest rates were zero, no longer made sense. Another positive in 2023 is, based on the Fed’s own words, we are close to an end to interest rate increases. That is good in terms of short-term pain. The wild card is how long the Fed may pause at these new higher rate levels. The bulls see them easing by year end; the bears see the Fed staying high longer, driving the economy lower. The final silver lining is hope in statistics. In years when the market has dropped this much, 80% of the time the following year is positive. Let’s hope.
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I spent time over the holidays thinking of potential positive surprises for 2023. What if we get a warm winter, especially in Europe? That could lower global inflation pressures as we continue to try to boycott Russian oil in the western world. What if Russia withdrew from Ukraine and just decided the whole thing was a bad military exercise? What if, by next spring, Covid variations are so mild and the impact so muted that the global economy could ignore the concern and return to trade and travel as normal? The flip side of all those what-ifs is what if they get worse? In general, I try to be optimistic about US capitalism and its ability to be nimble, clever, and flexible. It can be and has adapted to many different circumstances in the past. I invest assuming that it will do that again in the future. We continue to stay invested in balanced portfolios based on your individual goals. There are some silver linings. Cash now pays a nice, positive return of 3-4%. Bonds with additional risk will pay even higher interest rates. Stocks are cheaper than last year (painfully so), but if you liked the market and the future of stocks last year, you are getting it at a discount this year. Hopefully, the discount does not get adjusted further to the downside.
I am really trying to enjoy the changing seasons of life. This past year has helped me to embrace the wisdom that comes with age. I am also happily letting go of the many things that were once very important to me and my pride. I look at the many success stories in our industry, none greater than Warren Buffet, and try and learn from them. Warren Buffet is still working well into his 90s. (Maybe there is another third to my career?) His investment philosophy – buy great companies, be positive on US capitalism and have a lot of cash for emergencies or opportunities – has worked well for him for 70 years. It has worked well for Bill Few Associates since 1987. We will make sure it continues to benefit you by meeting your long-term goals for decades to come. I hope we start strong in 2023. Traditionally, if the first five days of the New Year get off to a good start, that bodes well for the rest of the year. However, no matter how the markets start, we remain committed to the financial markets. If you have any questions or concerns, call us and speak to your consultant or anyone else at Bill Few Associates. We are here for you and that is a silver lining too!
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Bill Few Associates, Inc.
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All data from Barron’s, Morningstar and The Wall Street Journal