A MARKET REVIEW OF 2022 AND THOUGHTS FOR 2023
Daniel H. Moskowitz
Happy New Year! We start 2023 celebrating some milestones. John Raab, one of the founders of our firm, started his own investment advisory business 50 years ago. Many of our current clients started with him shortly thereafter and are still with us today - Thank You!
2023 also is the 25th anniversary of when John Raab and I started working together. John is no long with us, but his philosophy of acting as a fiduciary and not making speculative investments with client's money, lives on in the culture of Chatham Wealth Management today. Below is a quote from one of his many newsletters that I keep handy. This quote summarizes why we do not have cookie cutter models for our client's accounts.
John Raab client letter 12/27/1985 – “The assets I manage for you- whether it be your individual or joint account, your pension or profit-sharing plan, etc. I feel I am so attuned to your needs and objectives that it would be virtually impossible for me not to act in your best interest. Each account I have has it’s own little nuance. Hence, there can never be an investment category for you.”
Some additional milestones to note: Brian McGeough, CFP® celebrated his 5-year anniversary a few weeks ago and John Lui, CIS will celebrate his 14th year with CWM this spring.
2022
2022 was a tough year for the markets. Performance was marked by double digit losses for the most commonly held asset classes. It was even worse for some of the more popular assets that were all the rage the past few years.
Source: Bloomberg, FactSet, MSCI, NAREIT, FTSE Russell, Standard and Poor's and J.P. Morgan Asset Management.
Selected 2022 Asset Performance for Some Recent Highflyers
Bitcoin (GBTC) -76%
SPAC’s (SPAC) -36%
Cathie Woods Ark Innovation Fund (ARKK) -68%
Meme Stocks (MEME) -63%
All Data from Bloomberg LP
The most recent downturn in both stocks and bonds was just another of many setbacks the markets have endured (think pandemic, financial crisis, and internet bubble). Once again, we did our job. We have protected our client assets through our long-held philosophy of holding high quality securities, diversification, and not speculating.
Last year at this time, I wrote the following in my commentary regarding interest rates : "Just like 2021, holding very conservative bonds (US Treasuries) will probably cause you to lose value as rates move higher. We continue to favor shorter duration corporate bonds, and tax-free municipal bonds to offset that risk."
Wow, was I right! 2022 was the worst year for bonds in my career. The 10-year Treasury bond lost more than -16%. And the Barclays Aggregate Index (most common proxy for the bond market) lost -13%.
On the stock side, we made a conscious effort to be underweight technology stocks. This paid off as the NASDAQ (-33%) greatly underperformed the general market for the first time in years. Why did this occur? When interest rates are rising and you can earn a relatively high rate of return risk free, waiting for longer duration assets to pay off is not nearly as attractive.
This means that portfolios made up of 100% US stocks should have lost -18% and a 60/40 portfolio of stocks and bonds would have lost approximately -15%.
This quick rise in rates from virtually zero caused the bubble in almost everything (growth stocks, SPACS, Bitcoin, etc) to burst without dire consequences so far. The cryptocurrency calamity (FTX and others) hasn’t turned into a contagion. The SPAC debacle has also been contained. There is still some air in the growth stock bubble, but much less than there was at the beginning of the year. Home prices are not in a free fall for now and may get supported by a shortage of inventory.
2023
Let’s start the discussion about what will happen in the markets over the next year with a warning. One year ago, the Federal Reserve was forecasting that real GDP would grow a strong 4.0% in 2022, that prices would be up a relatively moderate 2.6%, and we should expect a grand total of three 25 basis point (bp) rate hikes by the end of the year. Instead, it looks like real GDP will be up about 0.5%, prices will be up 5.6%, and we had the equivalent of seventeen 25 bp Fed rate hikes, finishing the year at 4.375%.
The lesson to be learned is that predicting the short-term direction of markets is not an easy task, but we will do our best.
Bonds - The investment landscape for bonds has changed. We are no longer in a TINA world (There Is No Alternative to stocks). Bonds have become a more attractive asset class. While being able to earn 4% or 5% is vastly better than the 1%-2% world we were in for many years, it is still below historical averages. You could still lose some market value and opportunity cost if rates move higher but holding high quality bonds to maturity now means you will earn a decent return. We believe it is more likely that the Fed rate increases will slow the economy enough to stabilize rates and are more likely to be lower than higher a year from now.
Recession - The most asked question we get from clients is, “When will the recession start and when will it be over?”. We are in the camp that believes a recession is not a forgone conclusion. We told you last year we wouldn’t have a recession in 2022 and we were correct. At the moment, corporate earnings are at an all-time high, unemployment is at an all-time low and the consumer is still spending money. Could this change? Absolutely, the Fed is continuing to raise rates but if the inflation numbers continue to trend lower, they could be done sooner rather than later.
Stocks - CWM’s Chief Investment Strategist John Lui sums up our thoughts on the direction of stocks in his blog piece written last month. https://www.chathamwealth.com/blog. Here's how he concluded his commentary: " All of this points to a market bottom as the Fed moderates rate hikes, pauses and eventually cuts. Near term earnings may be revised downward but earnings growth will remain positive. Corporate earnings will also be positive and price earnings multiples will soon expand as they discount a moderating/pausing/easing Fed. The price earnings multiple expansion has a much more powerful valuation impact on stocks relative to the negative earnings revisions that is expected. This is exactly what has happened over the last 12 months: stocks went down despite great earnings growth because the price earnings multiple contraction overpowered it. The opposite will happen now.
Private Investments - Warning - Stay away from high fee private investments as pricing is a mirage. One of the potential problems we see on the horizon is the amount of money that has been raised by brokers and put into semi-liquid private REIT’s and Private Debt. Some of these vehicles have become overly bloated with deals that aren’t being priced correctly, and on top of that, the funds have had to pay up for sub-par deals to get the allocation they need. If you have any questions on this, please reach out to us.
Administrative Issues
We would like to thank those clients who have referred business to us in the past year. Thank you!
Each year the SEC requires us to offer you a copy of its Securities and Exchange Commission Form ADV, Part II. This form documents offers standard information on our partnership. If you would like a copy, please let us know.
2022 Tax Documents – 1099’s should arrive in the mail in early February. The 1099’s have gotten much better in the last few years. They now include all cost basis information and all management fees paid (if debited from your account). Your tax preparer will need the 1099 to properly prepare your tax return.
Should you have any administrative issues, you can always reach out to Kori or Christy, and be assured they will strive to help you in a timely and pleasant manner. Both can be reached using our toll-free phone number at (800) 472-8086.
In closing, we wish all our clients and friends a happy, healthy and prosperous 2023. We want you to know that we value and appreciate your business. Thank you for trusting us to manage your financial well-being.
Sincerely,
Dan Moskowitz CFP®
President