From a stock market perspective, I’m glad 2022 has finally closed. It was a confusing year, to say the least. For the first time ever, we had a recession, as defined by economic indicators, but the government tried to sell us that it wasn’t really a recession.
Government policies created what they first declared as “transitory” inflation, only to be followed by the highest actual inflation readings in forty years. In June of 2022, inflation was measured at 9.1%. To the average family, this “transitory” inflation translated into an increased cost of $450 a month just to buy the basics of life compared to a year earlier.
Our political leaders created this devastating inflation by printing and flooding our economy with trillions of dollars of non-existent money. Then to try and stop the inflation, the FED tried to reverse the inflation by raising interest rates at the fastest pace since the 1980s.
We started the year with short-term rates near zero and saw seven rate hikes. Before 2022, there hadn’t been a 75-basis-point increase since 1994, let alone three in one year. Raising rates that fast created even more financial pain and a host of other problems.
This type of erratic behavior felt like you were following a crazy driver on the freeway who speeds up to 100 mph then, slams on their brakes and, drives 40 mph, then repeats the process over and over.
“Stable” long-term Treasury bonds lost 30% on average, while average intermediate-term bonds lost over 13%. Even short-term bonds lost more than 5% making 2022 the worst year for bonds in most investors’ lifetimes. Bonds are theoretically where investors go for safety.
Equity markets were also beaten up in 2022. The S&P 500 had its worst first half since 1970 and, for the year, lost 18.2% of its value. The tech sector, which has been unstoppable, ran into a wall as the tech-focused Nasdaq 100 sank 32.6%.
Add in a war with Ukraine, an end to national energy independence, and a broken supply chain…. And you have a serious self-induced economic mess.
At the same time, oddly, unemployment stayed low while wages kept rising. That is not normal during a recession. But then, dropping trillions of extra dollars and incentivizing people not to work for three years is also “not normal.”
Is the economy really as bad as the indicators show, or is it as good as the indicators claim? That is the question that has yet to be answered.
Nate will discuss our recent performance in more depth in his article. In short, Managed Income performed extremely well, considering it is primarily invested in interest rate-sensitive investments. It declined by -7.7% versus -13.0% for its benchmark, the Barclays Intermediate Bond index. Most of our clients have a significant portion of their accounts in Managed Income which helped buffer their downside last year.
Top Flight was down -19.0% for 2022. Compared to a combination of the S&P 500 (down -18.1%) and the NASDAQ (down -33.1%), Top Flight’s performance was relatively strong. While we never liked the negative performance, we felt good that we could outperform our benchmarks in a bad year.
What Happens Next?
As discussed, the markets had an extraordinary amount of bad economic news last year. From a fundamental standpoint, the question is whether or not all of that bad news is already baked into current market levels. If it is, we may be getting close to a turning point in the markets, as they are a leading indicator. However, if there is still more bad news to come, then we may be in for some more pain.
From a technical standpoint, we are at a very interesting place. The ten-year trend line of the S&P 500 shows that we are currently aligned with the long-term trend. That long-term trend line has been fairly consistent over the last decade.
In March of 2020, when Covid was introduced to the world, the S&P 500 dropped about 35% in three weeks. I remember numerous media outlets screamed that it was going to get much worse from there. Several financial newsletters made compelling cases that we were going to enter into a full-fledged depression. After that selloff, relative to the ten year trend line the primary market indexes were very undervalued.
Instead of continuing down, the markets reversed and regained all of their losses. Then, driven by trillions of dollars infused into our economy by the federal government, stocks continued moving up for most of the next 21 months. At this point, the S&P 500 was now very overvalued relative to the ten year trend line. Since then, the market sold off ending significantly down in 2022.
Currently, relative to that 10 year trend line we are not overvalued or undervalued. We are once again right in line with it. While that does not guarantee anything it does give me peace of mind that after this 2022 selloff, we are essentially back at fair value based on the long term trend.
I just completed my first year as the part-time Mayor of Orem. As such, I encountered my first political hit job. I had what I believe to be a completely frivolous lawsuit filed against me in Alabama. The short version of the story was that my son and a friend entered into a financial agreement that went sideways. My son’s friend decided to sue me in order to try and collect what he thought my son owed him.
I had nothing to do with their agreement. Somehow, the Alabama judge decided to assess me more than five times the amount that was in question. That judgment occurred in May of 2022. Because this judgment makes no sense to me, I appealed it to the Alabama Supreme Court, where it is currently.
Even though this occurred last May and is going through legal due process, Utah news stations were tipped off to the story last month. Normally, a story like this would not be reported as breaking news. Even more unusual, it would not be reported on seven months after it happened.
At any rate, this is not likely something that you care about. However, if you do have any questions or concerns about it, please reach out to me. I am happy to answer any questions you may have.
January 2, 2023, was a sad day for me. A good friend I have known and invested with for the past 35 years died tragically that day. He was taking off in his private jet from the Provo airport at about noon, and something went horribly wrong.
Nathan was a legend at Nuskin, an épic entrepreneur, and a successful real estate developer. He was an amazing person whom I looked up to and respected for the person he was. He is one of those bright lights that made the world a better place and will be seriously missed.
I’m sharing this with you because I’m shocked, surprised, and sad to see my good friend leave this world unexpectedly. His passing reminds me that we never know when we will breathe our last breath. More than anything, his passing reminds me to focus on what really matters and make every day count.
My recommendation is to control what we have the ability to control and make 2023 the best year possible. I appreciate each of you as a client and the relationship we have developed over the years. Have a great year!