Dear Clients & Friends,
Happy New Year! I customarily begin my first commentary of the year restating our overall approach to investment advice, even in the context of a letter primarily focused on the past year. We are long-term, goal-focused, planning-driven investment advisors. We believe deeply that lifetime investment success comes from continuously acting on a well-crafted plan. Additionally, we believe subpar returns, and even investment failure, comes from reacting to current events.
The surprising and indeed unforeseeable economic, market, political and geopolitical turmoil of the past three years (since the onset of the global pandemic) demonstrates conclusively that the economy can never be consistently forecast, nor the market consistently timed—not by us, not by anyone. Therefore, we believe that the most reliable way to fully capture the significant returns of equities over time is to ride out their frequent but ultimately temporary declines.
These will continue to be the bedrock convictions that inform our overall investment approach, as we help you and your loved ones pursue your most important lifestyle and financial goals. Please contact me directly if you wish to discuss our investment process and/or our investment philosophy in more detail—that’s precisely what I’m here for.
Now with that piece of business out of the way, I would like to share some thoughts on what can only be described as a terrible year for investors—with BOTH the stock market and the bond market posting negative returns for the first time since 1969.
The central drama of the past year—which will likely carryover into the new year—was the Federal Reserve’s rather belated but very aggressive efforts to bring inflation under control. Inflation reached a 40-year high at the beginning of the year, and the Fed sprang into action to raise the federal funds target rate from 0.25% (where it stood in March) to 4.50% by the end of the year. The Fed hiked rates on seven different occasions throughout the calendar year, which was an unprecedented undertaking not only in terms of the actual number of rate hikes, but more importantly, the rapid pace in which rates went from virtually zero to mid-single digits.
As one would expect, the market responded quickly in response to the Fed’s actions. After rising just over 416% in the nearly 13 years between the market bottom of the Global Financial Crisis (March 9, 2009) and this past January 3, (the market’s all-time high point), the U.S. equity market sold off sharply; at its most recent low point in October, the S&P 500 Index was down 27% from the January peak. (Bond prices also collapsed in response to sharply higher interest rates.)
However, we need to keep in mind, that despite all the market craziness we’ve experienced since the onset of the pandemic early in 2020, the mainstream equity market managed to close out 2022 moderately higher than it was at the end of 2019 (3,839 vs. 3,231—which represents a gain of nearly 19%). Not great, but not at all bad for three years during which our entire economic, financial, political, and geopolitical world was turned upside down.
If anything, this tends to validate our core investment strategy over these three years, which—simply stated—has been: stay the course, tune out the noise, and continue to work your long-term financial/retirement plan. Needless to say, this continues to be our recommendation, and in the strongest possible terms.
The burning question of the hour seems to be whether and to what extent the Fed, in its inflation-fighting zeal, might tip the economy into recession at some point—if it hasn’t already done so. Over the coming year, the way this plays out will likely determine the short-term direction of equity prices. My position continues to be that this outcome is simply unknowable, and no one should make strategic investment decisions based on things that are unknowable.
That said, I continue to believe strongly that whatever it takes to put out the inflationary fire will be well worth it. Inflation is a cancer that affects everyone in our society; if recession proves to be the painful chemotherapy required to destroy that cancer, then so be it. The last thing we want for the economy and the markets is a prolonged spell of annoyingly high inflation.
Although this may be hard to remember every time the market twists and turns over some irrelevant and short-sided economic data point, we are not investing in the macroeconomy. The bulk of our client portfolios are comprised of the Great Companies of America—businesses which at this very moment are opportunistically refining their strategies and business models to meet the needs and wants of an eight-billion-person world. While 2022 will undoubtedly go down in history as a lousy year for investors, it is years like this that remind us of the price we must pay for winning in the end.
As I always say—but can never say enough—thank you for being our clients. It is a genuine privilege to serve you. I wish you and yours a healthy, happy, and prosperous New Year!
Nick Enzweiler, CFP® is registered representative with, and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group, a registered investment advisor. Strategic Wealth Advisors Group and Mercer Partners Wealth Management are separate entities from LPL Financial.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of January 4, 2023.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet. The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This Research material was prepared by LPL Financial, LLC.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Past performance does not guarantee future results. Asset allocation does not ensure a profit or protect against a loss.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions.