Amid Short-Term Speculation, Take a Long-Term View
A new year is a time for new resolutions. Annual resolutions usually include gym memberships, eating healthier, reading more, or increasing time spent with family. All of these are noble endeavors.
We don’t hear much about resolutions in the investing business. Rather, we hear a lot about forecasts. The new year will bring a new wave of forecasts, such as S&P 500 price targets, actions the Federal Reserve may take, and predictions on the direction of the U.S. economy. These are less noble endeavors, but we certainly acknowledge there’s an audience for them.
As we engage with these predictions (almost impossible not to if you own a cell phone or a TV), keep in mind that no one has privileged access to the future.
No one knows how high inflation will go or when it will subside. No one knows if oil prices will return to the highs of last summer. No one knows how many times the Federal Reserve will raise rates or the direct impact it will have on the economy.
Speculating on these topics is best left to others. A report from JP Morgan last year mentioned the holding periods for many institutional money managers sit well below one year. Buying and selling may get the blood pumping, but as Charlie Munger said, “The beauty is in the holding.” We tend to agree, even if that puts us in the minority.
Globally diversified investors willing to tolerate short-term volatility in the pursuit of long-term returns can seem rare. This was especially the case last year. Over time, however, we believe the benefits of adopting this mindset can be enormous.
These are our observations about the economy and major asset classes over the past year:
Inflation and the Federal Reserve’s response were the economic stories of the year. Inflation was suffocating consumers – reaching 40-year highs – and sent the Federal Reserve on an aggressive path of interest rate hikes to quell consumer demand. The result was one of the worst years on record for investors.
We don’t know what will happen with the economy in 2023. The probability of a recession is a consensus view, but that doesn’t mean it can be predicted with certainty. Even if you had a crystal ball that provided next year’s economic news today, it likely wouldn’t help you predict where the stock market goes.
There’s a case to be made that the best outcome of all is a slowing economy that coincides with slowing inflation. Every month since June, inflation has declined, which is a trend we would like to see continued, and the labor force remains resilient with 10.6 million open jobs and an unemployment rate of 3.5%, both historic numbers.
The headlines may look bad, but under the surface, the situation might be better than we think.
The stock market didn’t offer many places to hide last year. Global stocks (MSCI All Country World IMI Index) fell 18.2% as markets around the world grappled with inflation. U.S. large cap stocks (S&P 500 Index) struggled, losing 18.1%, while U.S. small stocks (Russell 2000 Index) and international large stocks (MSCI EAFE Index) dropped by 20.2% and 14.5%, respectively. Emerging Markets (MSCI Emerging Markets Index) fell 20.0% on the year as China, the largest emerging market, dragged down the index. It’s worth noting that value stocks did markedly better than growth stocks.
Bad years for equity investors have always provided opportunity in the past; there’s no reason to believe this time will be different.
The bond market had one of its worst years in history. U.S. intermediate-term bonds (Bloomberg U.S. Aggregate Bond Index) were down 13.1%, the worst annual return for the index, which dates back to 1976. International bonds (JPM GBI Global Ex U.S. Index) struggled as well, losing 21.8%, while TIPS (Bloomberg Global Inflation Linked U.S. TIPS Index) fell 11.8%.
The good news is the bond market has recalibrated with yields adjusting higher. Higher yields mean higher future returns. And for the first time in a while, there’s an argument that bond income is attractive and provides true competition versus owning stocks.
Alternatives provided valuable diversification in a turbulent year for stocks and bonds. Trend following (Credit Suisse Managed Futures Liquid Index) had a great year, up 21.7%. Direct lending (Cliffwater Direct Lending Index) also posted positive returns, finishing up 7.7%. On the negative side, reinsurance (SwissRe Global Cat Bond Index) was down 2.1% while event driven (IQ Hedge Event-Driven Index) slid 13.2%, and real assets (DJ Brookfield Gbl Infrastructure Index) dropped 5.8%.
As we enter 2023, Savant remains focused on the things that matter most to our clients. We continue to invest in people and technology to help us deliver the best experience to clients across financial planning, investments, tax planning, wealth transfer, and aligning your assets with your goals, all with a watchful eye on additional offerings our clients may need.
We are confident that, together, we can navigate whatever the future holds, and we look forward to serving as your wise counsel on the journey.
Sources: Morningstar Direct, Federal Reserve, Bureau of Labor Statistics, JP Morgan Asset Management.
Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. This is intended for informational purposes only.
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