What Happened in 2022
Coming off the back of a 28.7% return in 2021, Wall Street pros predicted the S&P 500 would have a strong 2022, ending the year between 4400 and 5300. Instead, markets were walloped across the board as the global economy adjusted to inflation and higher interest rates. The S&P 500 finished down 18.11% at 3839.50. No one predicted this, least of all the Federal Reserve. At the end of 2021, the Fed’s expectation of the Fed Funds rate twelve months later was under 1%. It ended 2022 at 4.25-4.50%. And that’s a statistic they control!
The Federal Reserve gave us a couple of acronyms after the Global Financial Crisis. ZIRP (Zero Interest Rate Policy) gave birth to TINA (There Is No Alternative). The idea behind TINA was that with rates so low there was no alternative to investing in stocks. The Federal Reserve raised rates 4.25% this year, determined not to repeat the mistakes of the 1970s in their fight against inflation. Last year, growth was the only number that mattered to the market. This year, money started to cost something and fundamentals are important again. Investors also have someplace to park their money where they can earn a nominal (if not real) yield.
2022 was expected to be a stock picker’s market, at least by the stock pickers. The case for active managers has changed from being able to pick winners (they were not able to do this) to being able to lose less in down years. How did it go? 2022 was a coin flip. Despite the big down market, the S&P 500 still outpaced 50% of active large cap blend managers during the calendar year. Meanwhile, the index outperformed 69% of active managers over the previous 3 years, outperformed 78% over the previous 5 years, and outperformed 87% over the last 10 years.
The collapse of crypto-currency exchange FTX probably would have escaped mainstream notice if not for its colorful cast of characters. Quirky and brash style led to magazine covers and feature stories. In hindsight it was a mirage constructed to seem that the company was pre-screened by smart people. Investor due diligence softened and red flags were overlooked. Some ESG rating firms had FTX rated higher than Exxon Mobil even in the Governance category despite FTX not having a board or CFO. Governance is boring and old-school. The FTX story was flashy and supposedly saving the world via “effective altruism”. In the end, the only thing the media loved more than the rise of FTX was the firm’s very public fall from grace. This is a reminder not to be complacent. Don’t compromise sound investment strategy and diligence in the face of shiny stories and fear of missing out.
Fairway made one new hire this year – Ben Karlo, to support our client service and operations team. Franco DiLiberto earned promotion to Manager, Wealth Management Services. Brian Tullio earned promotion to Wealth Manager. These changes were also announced on our social media pages.
Buzzwords: Ukraine, Mid-Term Elections, Inflation, Rate Hike, Energy, FTX, SBF, Pivot
Outlook for 2023
It’s sometimes said that the markets exist to make the largest amount of people look foolish as possible. As painful as it was for investors, many of them will learn the wrong lesson from 2022 and make wholesale changes to their portfolios by either chasing safety or whatever they think worked last year. Stress has a way of shortening people’s time horizons. Patient investors know to focus on process rather than short-term outcomes, and that short-term market stresses tend to lead to long-term opportunities. 2022 brought a surprise in higher yields that a vigilant investor may take advantage of. Higher yields on bonds and more reasonable valuations on stocks are reasons for optimism going forward.
Predictions are more marketing than analysis. The forecasting horse race happens every year and if anyone bothered to check, the experts are usually way off. There’s no better evidence than the link above. None of the pros got it even close in 2022. Some firms have found a way around this: have multiple employees make predictions. Whoever gets closest is paraded around the media as evidence of the firm’s market savvy, while the others are quickly forgotten.
There is one evergreen certainty for the markets: financial salespeople want you to put your money in motion. Wall Street marketing departments are working overtime to sell private, illiquid investments after public markets dropped in 2022. Beware any private investment that touts low volatility. This is like saying the price of your home has low volatility. Just because you’re not buying and selling your home multiple times per day (price discovery), doesn’t mean the price hasn’t seen meaningful change. Cliff Asness calls this volatility laundering or volatility washing. Assets that aren’t marked to market every day/hour/second will seem to have low volatility relative to assets like public stocks which are traded millions of times per day.
Annual predictions often focus on what will change in the coming year, but it can be more valuable to recognize what isn’t changing. Rebalancing and tax loss harvesting will continue to serve investors well. Be mindful of taxes, especially when anyone suggests you put your money in motion. Chasing yield or returns will increase the odds of an unforced investment error. Investors should say no (or have us say it) more often than they say yes to pitches. Just like every other year, Wall Street expects 2023 to be a stock picker’s market. Just like every other year, we suggest ignoring the sales pitch and sticking with what works over the long-term. Control costs, manage taxes, and most importantly, stick to and execute on your individualized financial plan.
If you request that we move money via wire transfer, expect a phone call from us to confirm. Scams are getting more sophisticated. The best way to protect our clients is to obtain a verbal confirmation.
The news is unrelenting and consistently negative. As usual, we will be reaching out to you throughout the year, but if you feel the urge to pick up the phone and talk about anything, we are here. Retirement goals are being hit. People are getting married. Babies are being born. We want to hear about it. It’s easier than ever to fall into social media or the news cycle and forget that there are reasons to celebrate and there are people to share those triumphs with.
We are thankful and humbled by the support and kindness we’ve received from our clients this year. We promise to deliver on our core values: Integrity, Service, Reliability, Insight, Excellence, and Results.