I don't think anyone can look back at 2022 and consider it a "normal" year. Equity markets experienced a bear market for the first time since 2009, and bond markets had their worst year in over a century; meanwhile, cash was getting hammered by inflation. There was simply no place to hide for investors - it was as if 2022 fell from the ugly tree and hit every branch on the way down!
But there is something funny about the 2022 bear market; historically, it was just a "normal" bear market. Looking back at history, we see that average bear markets last about 11.3 months, in which the average drop for the S&P 500 Index was 31.4%.
It sure didn't feel normal; with investors being so emotional, but it might be helpful to look back at last year's good and bad news.
Let's talk about the bad news first:
• 2022 WAS A UNIQUELY POOR YEAR FOR RETURNS: I dread to show you these numbers, but when we are eager to embrace the good times, we must stand and face the bad ones. Here are the 2022 market returns [total return as of December 30, 2022]:
a. Stock Indexes:
i. S&P 500: [ -18.11% ] (Source)
ii. Dow Jones Industrials: [ -6.86% ] (Source)
iii. U.S. Small Cap: [ -19.86% ] (Source)
iv. NASDAQ (Tech): [ -32.54% ] (Source)
v. International - Developed: [ -16.06% ] (Source)
vi. International – Emerging Markets: [ -17.98% ] (Source)
- BONDS DIDN’T PROVIDE MUCH COMFORT: Cheer up, though; at least your cheeky brother-in-law, whose always been in bonds and has relished your past bear market misfortunes, also endured a beatdown that will go down in the annals of history as one of the worst years for bond returns:
b. Bond Indexes:
i. U.S. Aggregate Bond Index: [ -12.03% ] (Source)
ii. U.S. Government Bond Index [ -10.83% ] (Source)
Talk about an "ouch"! (Insert your favorite ouch meme here). While yes, you can make fun of his bonds' lackluster performance, his response to your friendly joshing is that bond yields are much more appealing now, with yields not seen in over two decades.
- THE FED FINALLY USED ITS BAZOOKA: Those investors who thought the Fed would be lackadaisical in increasing interest rates were wrong. Boy, were they wrong by A LOT! In a mere nine months the Fed has increased the discount rates by over 1,700%, this is tied for the sharpest increase in rates in the Fed 108-year history. WOW! The Fed has been very transparent with their message – they will kill inflation, even if it takes the economy down. It seems that every time Fed Chairman Powell spoke, the markets tanked. It was brutal. (Source:Cato Institute)
- INFLATION WAS AND IS EVERYWHERE: Investors can take comfort in knowing that the U.S. wasn't the only country suffocating under the blanket of inflation. 43% of the world's countries experienced double-digit inflation. The U.S. finished a shade over 7.7% for 2022, and yes, I know it's a kissing your-sister number; however, it could have been much uglier (Source: Visual Capitalist)
It shouldn't be surprising that all of this bad news heavily weighed on investors. 2022 was one the worst years on record for investor sentiment. The worst before 2022 was 2008-2009, and of course, we know what followed 2009 – One of the greatest bull markets in history. Before you accuse me of being foolishly optimistic, I'm not suggesting it will happen again; I'm simply pointing out that there should be a limit to your pessimism.
Now let's look at the good news:
1. EARNINGS ARE ON THE MEND: Most mom & pop main street investors only pay attention to the value of their portfolio, losing sight of the great American companies they own. Those great American companies grew their underlying earnings by an estimated 5.1% in 2022. Patient, long-term investors have always known the value of monitoring corporate profits. With good earnings, underlying stock prices can grow. The one good thing about those great companies in your portfolio is their ability to adapt, no matter the environment. The great American companies will make the necessary changes to ensure their earnings continue to grow. (Source: FactSet)
2. DIVIDENDS ARE SEXY AGAIN: The S&P 500 companies paid a record $561 billion in dividends last year, an increase of almost 10% from 2021. Dividends are corporate America's way of paying back the loyalty of shareholders and combine that with the amount of cash in corporate coffers; dividends may be here to stay for the foreseeable future. Increasing dividends can bring a smile to the most pessimistic Debbie Downer. (Source: Wall Street Journal)
3. GLOBAL ECONOMIC OUTPUT CONTINUES UNABATED: Despite the seemingly endless number of troubles throughout the globe, according to the IMF, global GDP officially crossed the $100 trillion mark in 2022. While equity markets may continue to be volatile, it's a positive sign to know that the world's economies are getting bigger and stronger. The world's demand for goods and services only grows, which history has shown, helps the impoverished build better lives. (Source: IMF)
I know that last year was exhausting for investors. I know because I'm one of you, and I'm exhausted too. While I don't know what will happen in 2023, I prefer to see the light rather than the dark.
As bad as the headlines make it sound, there are just too many positive things happening in our world to be eternally pessimistic. Believing that the momentum of human progress will continue has historically been proven accurate.
I wish you health and prosperity in 2023!
Stay the course, my friends!