Recap of 2022

Across the board, 2022 was a challenging year for investors.  Stocks had their worst year since 2008 with the S&P 500 Index dropping 19.4 percent.  The possibility of a coming recession was the main cause of investors’ pessimism.  To make matters worse, fixed-income assets (bonds) took a beating in 2022 as well.  The U.S. Aggregate Bond Index was down 11.8 percent.  This decline was caused almost exclusively by the U.S. Federal Reserve Bank’s campaign to stifle inflation by raising interest rates.  It is a rare year that both stocks and bonds close in the red.  Historically, over long periods, the correlation between returns for the two asset classes is quite low.  But on occasion, there are times when both get knocked down as happened in the year just ended.

Within the overall S&P 500, there was a wide divergence of performance between various sectors.  Among the worst performing groups were the high margin, highly competitive sectors such as Communications Services, down 40 percent, and Information Technology, down 29 percent.  On the other hand, companies with slow but steady growth rates did much better by comparison.  Utilities were virtually unchanged, and Consumer Staples lost only 3 percent.  The Energy sector, feeding off higher commodity prices due to restricted supplies of oil and gas, was the high achiever of the year gaining 59 percent.

Heading into 2023, where do the investment opportunities lie?  Wall Street’s fixation on the short term gives us an opening.  Market pundits and sell-side analysts obsess over daily share price moves while corporate leaders admit their lack of near-term visibility.  In fact, stock prices are much more volatile than the value of the underlying assets they represent.  Therefore, focusing on the next five to ten years, rather than the next five to ten weeks, is more productive and likely more profitable.  While the market constantly gyrates in response to the drama de jour, an objective investor with the temperament to look beyond the noise and bear short-term pain stands to achieve significant long-term gains.  After all, how we feel about things is not an investment strategy.

1 January 2023