2022 Year In Review
2022 was a fascinating year from many perspectives.
In the public markets, both stock and bond prices went down. Russia attacked Ukraine. The mid-term elections were more pink or purple than red. Interest rates started going up. Inflation continued unabated with household inflation typically greater than the headline numbers generated by the federal government. Housing prices started easing. And most businesses we know had their best year, or one of the best years, ever. And this morning, the sun came up.
Public Markets
The three major stock indices, the Dow, the S&P 500, and the NASDAQ, were off roughly 9%, 20%, and 33% respectively. International markets fared no better, with Germany’s DAX off 12%, the Asia Dow off 14%, the Nikkei 225 off 9%, and the Shanghai Composite off 15%. London’s FTSE was the bright spot, finishing 2022 essentially flat.
Same story with bonds. Whether short-term municipals or Treasuries, long-term government, short or long corporate, investment grade or high yield, all bond categories were off for 2022. The range was off less than 3% for short-term TIPS to 25% to 30% for long-term government and corporate debt.
Balance of Power
Prognostication over geopolitics I’ll leave to others. My favorite author in this regard is George Friedman of Geopolitical Futures. The short version of all this is Russia desperately needs to be a world superpower. And struggles to do so with an aging population, diverse ethnic groups, and being ostracized by much of the developed world. Russia does feel threatened by Western support of Ukraine as well as the prospect of NATO membership by Ukraine.
China? They are watching the dance between Russia and the Western world. While struggling themselves. They have priced themselves out of the world market in terms of being a low-cost manufacturer. As a country, and like Russia, they are struggling to maintain control of a massive piece of real estate and diverse ethnic groups. While attempting to work through billions and trillions of debt and maintain their game face.
Across the political world, nationalism rather than globalism is front and center. Environmentally, the move is away from oil and coal as energy resources. In the world of commerce, companies are returning manufacturing closer to the point of sale. The war for talent is real. And especially that talent with deep technical expertise, a terrific attitude, and the ability to carry a conversation in a format other than a text message. Economically, sovereign nations and far too many companies are engorged with debt.
And in all this, we are called on to make decisions at the confluence of life, business, and money. Exciting times, right?
What’s Next?
The crystal ball is broken. The repair shop won’t return our phone calls. Here’s what wouldn’t surprise us.
Interest rates. Will go up another 1.5% to 2% and then stabilize. This would put the Fed Funds rate in the 6% to 7% range. What will the FOMC do? We don’t know. And they don’t know. The highest Fed Funds rate in the last 70 years was 19% in June 1981. The lowest was 0.05% in April 2020.
Bond market. It will wallow. Some see opportunity in bonds. We see massive sovereign and corporate debt that at some point must reset. Modern Monetary Theory posits that sovereign entities can print money ad infinitum as long as they control inflation. Well, MMM is being tested as it runs right into real life. We will pass on buying debt.
Stock market. For some years, we have not been fans of index funds. Since at least 2009 until early 2022 though, nothing beat the S&P 500. I’m aware of the Bogleheads’ attraction to this low-cost way of accessing the stock market. And I know that there are cycles; times when passive investing works better, others when active investing works better. We embraced a low-cost active approach at least five years ago and continue to endorse this approach.
2023? A focus on dividend-paying stocks. Especially those companies that provide food, clothes, housing, transportation, and finance.
Real Estate. Build your cash, as we have been recommending for a couple of years. Opportunity should show up and stay awhile within the next twelve to eighteen months. For those with cash on hand, this should create some meaningful buying opportunities.
Business. If you as a business owner, choose to have no business debt and to maintain cash reserves for the business. With this approach, economic and business cycles are much less troublesome. And such cycles can actually present opportunities. As you are prepared, you can add talent or other businesses at a discount during business and economic downcycles.
Which sectors tend to do well or at least suffer least during challenging and uncertain times? Healthcare and senior services. Freight and logistics. DIY home repairs and maintenance. Finance and accounting. Streaming and Video. Cyber Security and IT support. And of course, food and utilities.
Summary
Stick with the basics. Spend less than you make. Avoid debt. Always have some cash set by. And let’s talk about what all these thoughts and ideas might mean to your long-term plans.
Until we see you again, wishing you only the best.
Warm regards,
Randy Brunson