A Lump of Coal for Investors There’s no sugarcoating this. It’s been a rough year for investors, the worst since the financial crises of 2008. Inflation has ravaged, rates have surged, stocks have plunged.
As I write, the S&P 500 has shed nearly 20% and the Nasdaq is down 33%, with both indexes falling into a bear market. Apple, the most successful company of the 21st century, slid to a 52-week low on Wednesday, a 30% drop from the highs this year. Amazon is down 50% YTD. Meta down 64%. And don’t even get me started on Tesla.
For someone who fixates on the market, it’s been a frustrating and humbling experience. Among the many lessons learned in 2022, here are four that stick out.
As I write, the S&P 500 has shed nearly 20% and the Nasdaq is down 33%, with both indexes falling into a bear market. Apple, the most successful company of the 21st century, slid to a 52-week low on Wednesday, a 30% drop from the highs this year. Amazon is down 50% YTD. Meta down 64%. And don’t even get me started on Tesla.
For someone who fixates on the market, it’s been a frustrating and humbling experience. Among the many lessons learned in 2022, here are four that stick out.
1. Grandiose Market Predictions Are Almost Always Wrong
Remember those blue skies back in late 2021 when the markets were at all-time highs and prognosticators from analysts to economists to Uber drivers were predicting a bullish 2022? The Wall Street consensus was that the S&P 500 would reach 4,825 at the end of 2022. Some went further. Goldman Sachs analysts predicted the S&P 500 would close out 2022 at 5,100 points. Ditto for Fundstrat’s Tom Lee.
As I write, the S&P 500 is hovering around 3,840, down 33% from those lofty targets.
2. Predictions Fail Because of the Unknowable
First and foremost, analysts, economists, and Uber drivers bring their own biases to the table, infecting any and all predictions. Beyond that, there are variables in play that are simply unknown and unknowable. To wit…
3. Traditional Hedges Can Fail To Hedge
Rising interest rates speak directly to the bond market, where yields, which move inversely to prices, have soared. The result: 2022 has marked the worst year for bond holdings in a generation with the traditional 60/40 portfolio shedding almost 20% YTD.
"It's probably been the most difficult year from a rate of returns standpoint [for both equities and fixed income] in 15-plus years," says Wells Fargo Investment Institute President Darrell Cronk.
Will bonds ever resume their role as a relatively dependable hedge to equities? Yes – but rates will need to stabilize, something the Fed is working toward.
4. Sometimes, You Get Coal
The much anticipated Santa Claus Rally fizzled, and investors were left with lumps of coal in their stockings. The Santa Rally that wasn’t is emblematic of every market rally during 2022. Each one (and there were several) initially full of high hopes , like a line of bright shinny Southwest Airline jets.
And each one ultimately grounded, stuck on the tarmac and filled with seething passengers.
So it goes in bear markets.
What Lies In Store for 2023?
In a word: uncertainty.
“I don’t think anyone knows whether we’re going to have a recession or not and, if we do, whether it’s going to be a deep one or not,” Fed Chair Jerome Powell said on Dec. 14, after the Federal Open Market Committee’s final meeting for 2022. “It’s just not knowable.”
Recession or not, shallow or deep, most stock market forecasts for 2023 see moderate improvement by the end of the year. But investors conditioned for speedy stock market recoveries, which were helped along with generous support from the Federal Reserve, have been forced to rethink. Long-term trends and investing norms are shifting.
Our strategies have the tools to adapt along with those trends and norms. But with so much uncertainty about the new year, a cautious outlook seems prudent.
And For What It’s Worth…
With the slow-motion train wreck that is Tesla (down 70% YTD), Elon Musk has suffered the biggest loss of wealth in modern history with his net worth dropping by more than $200 billion. At least he’s not facing possible jail time (see below).
The runner-up award could probably go to bankrupt crypto entrepreneur Sam Bankman-Fried, head of the former crypto exchange FTX. From an estimated wealth of $26.5 billion earlier this year, Bankman-Fried says he is down to one credit card and his last $100,000.
Remember those blue skies back in late 2021 when the markets were at all-time highs and prognosticators from analysts to economists to Uber drivers were predicting a bullish 2022? The Wall Street consensus was that the S&P 500 would reach 4,825 at the end of 2022. Some went further. Goldman Sachs analysts predicted the S&P 500 would close out 2022 at 5,100 points. Ditto for Fundstrat’s Tom Lee.
As I write, the S&P 500 is hovering around 3,840, down 33% from those lofty targets.
2. Predictions Fail Because of the Unknowable
First and foremost, analysts, economists, and Uber drivers bring their own biases to the table, infecting any and all predictions. Beyond that, there are variables in play that are simply unknown and unknowable. To wit…
- Few saw inflation getting so out-of-hand so fast. Those who did see it (the Fed?) called it “transitory,” a byproduct of COVID lockdowns that would ease just as rapidly once supply chains unkinked.
- Outside of U.S. intelligence circles, almost no one expected the Russian invasion of Ukraine. The economic result: driving up food prices and triggering oil to spike from $70 to $130 a barrel (and backsliding to $70 again, BTW).
- Few saw the Fed pivoting practically overnight from pumping billions monthly into the bond market to embarking on four straight historic three-quarter point interest rate hikes. Especially when the Fed itself said in November 2021 that it expects inflation to abate in the second half of 2022 and had no plan to increase interest rates – at all.
3. Traditional Hedges Can Fail To Hedge
Rising interest rates speak directly to the bond market, where yields, which move inversely to prices, have soared. The result: 2022 has marked the worst year for bond holdings in a generation with the traditional 60/40 portfolio shedding almost 20% YTD.
"It's probably been the most difficult year from a rate of returns standpoint [for both equities and fixed income] in 15-plus years," says Wells Fargo Investment Institute President Darrell Cronk.
Will bonds ever resume their role as a relatively dependable hedge to equities? Yes – but rates will need to stabilize, something the Fed is working toward.
4. Sometimes, You Get Coal
The much anticipated Santa Claus Rally fizzled, and investors were left with lumps of coal in their stockings. The Santa Rally that wasn’t is emblematic of every market rally during 2022. Each one (and there were several) initially full of high hopes , like a line of bright shinny Southwest Airline jets.
And each one ultimately grounded, stuck on the tarmac and filled with seething passengers.
So it goes in bear markets.
What Lies In Store for 2023?
In a word: uncertainty.
“I don’t think anyone knows whether we’re going to have a recession or not and, if we do, whether it’s going to be a deep one or not,” Fed Chair Jerome Powell said on Dec. 14, after the Federal Open Market Committee’s final meeting for 2022. “It’s just not knowable.”
Recession or not, shallow or deep, most stock market forecasts for 2023 see moderate improvement by the end of the year. But investors conditioned for speedy stock market recoveries, which were helped along with generous support from the Federal Reserve, have been forced to rethink. Long-term trends and investing norms are shifting.
Our strategies have the tools to adapt along with those trends and norms. But with so much uncertainty about the new year, a cautious outlook seems prudent.
And For What It’s Worth…
With the slow-motion train wreck that is Tesla (down 70% YTD), Elon Musk has suffered the biggest loss of wealth in modern history with his net worth dropping by more than $200 billion. At least he’s not facing possible jail time (see below).
The runner-up award could probably go to bankrupt crypto entrepreneur Sam Bankman-Fried, head of the former crypto exchange FTX. From an estimated wealth of $26.5 billion earlier this year, Bankman-Fried says he is down to one credit card and his last $100,000.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember - especially now - that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean a significant position in a model built for protection. For example, the new Zen Knuckle with its volatility hedge. Or Bond Bulls and/or The 12% Solution, as they both have sensitive cash triggers, and can switch between different bond funds.
It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or the new Zen Knuckle and pretty much anything else.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management. Read more on the Investopedia page for Stop-Loss Orders.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember - especially now - that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean a significant position in a model built for protection. For example, the new Zen Knuckle with its volatility hedge. Or Bond Bulls and/or The 12% Solution, as they both have sensitive cash triggers, and can switch between different bond funds.
It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or the new Zen Knuckle and pretty much anything else.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management. Read more on the Investopedia page for Stop-Loss Orders.
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