March 9, 2023
2022 in the markets was like trying to surf through a minefield with a storm coming on. Having managed investments for more than 33 years now, 2022 was the second worst year I’ve had, second only to 2001. The tech heavy Nasdaq lost 33%, the S&P 500 lost 18% and the Russell 2000 (small company) index lost 20%*. Making matters worse, it was as bad for bonds. The Barclays US Aggregate Bond Index lost over 14%*. 2022 was the worst year for the bond index since it was created in 1976 according to Forbes. Per S&P Global, energy was the only sector that had gains in 2022 with technology and communication services the worst two sectors last year. In general, the more technology held in a portfolio the worse it did in 2022.
The Dow Jones Industrial Average (DJIA), which is only 30 stocks versus the broader S&P 500 (has 503 stocks now due to some with multiple share classes), turned in a loss of only 8.74% in 2022*. All thirty DJIA stocks are also in the S&P 500 so why such a difference between them last year? Looking at the performance of each stock in the indexes, six of the thirty DJIA stocks drove all the outperformance of the DJIA versus the S&P 500. As there are only thirty stocks in the DJIA, these 6 were much larger percentage in the DJIA then in the broader S&P 500. Diversification was not an ally in 2022. Other than a handful or so of stocks, excluding energy stocks, 2022 was quite literally, brutal.
While I wrote often last year that I favored energy service companies, fiduciary care and basic risk management prevents me from putting an entire portfolio into one sector. No one approach works every year in the markets. Based on what I’ve studied historically and through my own experience over the past 3 decades plus, I’ve found, with stock portfolios, focusing on companies that beat estimates, raise forecasts, have competent and sound management teams, with solid balance sheets is a winning approach over time
In a market with the fastest rate of interest rate hikes, fear led the mob to sell growth regardless if it met those factors or not. Good and bad companies were both heaped on the fire.
In my last Market Update before the mid-term elections, ‘Hold, Hold, Hold’, I wrote, “I think we could see a violent rally after US Midterm elections.” There was a rally through November, but it wasn’t violent, not even with the rally trend continuing in January erasing December’s drop. I cannot recall ever in my lifetime when the voices yelling economic doom and gloom was as one-sided as it was at the end of 2022. Despite that, stock markets rallied to start 2023.
What Now
In that same Market Update I went on to say, “Though many ideas seem attractive to me now, I think the time to raise the long spears (invest the cash) is coming soon.” Presently 1 year US Treasury yields are over 5% yield to maturity. Historically summer has been weak for stock market returns, headline risk from upcoming US debt ceiling debates, ongoing geopolitical pressure and rising consumer debt levels all add to the attractiveness of 5%+ US Treasury. Additionally, I believe the markets could be in a range for the next two quarters while we vet out if we’re in for a mild, severe or no recession. Looking beyond that though, I see so many attractive opportunities for long-term upside potential in different sectors of the market. So far in my experience, most of my biggest gains have come out of bear markets. Conversely the biggest mistake I’ve seen time and again by people, is throwing in the towel after a bear (20% or more) sell off like we had in 2022. Just think back, whether real estate, stocks, or business, how many times you wish you had bought something after a correction but didn’t out of fear? I still wish I had bought more property on the gulf of FL after the financial crisis. Remember whether you’re retired or not, if you’re planning on your money for 6 or more years, use short-term fear to acquire long-term opportunity.
I do not see any reason to rush all-in at once by any means at this point, though, the next two or three quarters could prove to be a tremendous time to acquire growth potential. So, for now, I’ve been adding to 1-year Treasuries for short-term monies and balancing that against owning core holdings that continue to demonstrate growing market share, raising forecasts, solid balance sheets and clear visibility to future growth.
Losses stink, a bad year sucks, but solid financial plans take this into account. Our team has been through lots of minefields: three of the worst bear markets experienced in US history, three of the biggest bull markets, multiple wars, six pandemics and countless geopolitical and natural events. Remember my and my family’s money, are invested the same way as clients, so we’re in this boat together. As your investment adviser, I’m daily assessing the data available and measuring risk vs reward potential. Should the data worsen, I expect to increase cash and Treasury levels in accounts, otherwise I continue to seek out targets for putting cash to work as inflation levels out. I remain ever thankful to work for you and I do not take lightly the trust you placed in me by hiring me as your advisor. Please call me at your convenience to discuss your portfolio or situation or should you have questions in general.
Sincerely,
Clint Gharib
* Index return data was obtained from Morningstar and S&P Global.
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Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. The S&P 500 Index is a widely recognized index including a representative sample of 500 leading companies in leading sectors of the U.S. economy. The Nasdaq 100Index is made up of the 100 largest non-financial companies traded on the Nasdaq stock exchange. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Nasdaq Composite Index is a market capitalization-weighted index of more than 3,700 stocks listed on the Nasdaq stock exchange. The Russell 2000 Index is a small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. These indexes are unmanaged. Investors cannot invest directly into indexes.
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