[Market Recap] Cup of Joe: Mid-January Market Update

2022 Recap – There was no shelter from the storm.
S&P 500 ended -18.1%
US Mid Cap, US small cap, International & Emerging market stocks all down -14 to -20%
The US Aggregate Bond Index had its worst calendar year ever.
Bottom line, everything outside commodities and energy stocks experienced significant repricing.
▪ Even cash, which stays stable.  After 7-8% inflation, your dollar today only buys you 92% of what it did a year ago.
A cautionary tale about investing and chasing performance:
▪ The tech sector was down -28.2% in 2022. At the start of the year, 8 or 9 of the Top 10 stocks in the S&P 500 were tech and the weight of that whole sector in the index was 30.5%.
▪ Lets look at the Tech Darlings: Apple, Amazon, Facebook (Meta Platforms), Google, Microsoft, Nvidia & Netflix. The AVERAGE performance of those stocks was -43.4%.  The BEST performer was AAPL at -26.3%.  Neither of these stats include Tesla, which clocked in at -65% last year.
▪ Two lessons to be learned here from the run up in tech and the year it just had:
1 Don’t become over confident.
2 Diversify. Index concentration was a double-edged sword.

Looking Forward – We expect this to be a year of change for inflation, Fed policy, global economy, and hopefully war.
Stick to your investment plan.  If you need a reminder of what that is, ask your advisor!  Stay the course and don’t capitulate!
▪ The stock market is not the economy, and the economy is not the stock market.  And differentiating those two with what you hear on the news can be really tough.
▪ [Historically] The stock market has started its long term recovery weeks or months before the economy bottoms.  The market wants to recover, it just needs to believe that sufficient uncertainty economically and structurally has subsided.

There’s lots of reason for hope…
▪ The Fed has already pulled it out of 5th gear and intends to keep moderating the its pace as long as inflation cooperates.
▪ Unemployment is still very low.
▪ Consumer behavior also has the potential to pull inflation down faster which would likely imply shifts in policy and market sentiment.
▪ Regarding the global economy China, has reversed its Zero-Covid policy with intentions of reigniting its economy… a major plus.
▪ Also, and somewhat counter-intuitively, the fact that it “feels” so bad may not be the worst thing historically.  S&P 500’s 7th worst calendar year, home prices and purchases are way down, inflation has been extremely elevated for a whole year, just to name a few.  This brings to mind the old adage “it’s always darkest before the dawn.”  And if you have any faith in the experience and wisdom of Warren Buffett, “Be greedy when others are fearful, and be fearful when others are greedy“.

But lets be conservative with our expectations… 
▪ External factors at play – Inflation is a wild animal that can surprise out of the blue, and global headlines always have the potential to stunt things.
▪ If you’re trying to play [[this bear market and recession by]] the numbers, since WWII the average recessionary Bear market has lasted about 15 months.  The Dot com market in early 2000s lasted just over 2 years, Great Financial Crisis of 2008 lasted 17 months, Covid crash of 2020 lasted 5 weeks.  In our current edition, the average of 15 months lands us at March 31 of this year.
▪ So we believe the prudent thing is to expect continued market volatility, for at least the first half of this year.  The longer it goes, the greater the odds get that the worst is behind us.

So remember, stick to your plan, control what you can control, tune OUT the noise, and have faith in perseverance.