Principals For Surviving The Crisis-Du-Jour In 2023
in 1972, after an incredible post-WW2 run that saw the market grow 8-fold, the wheels began to fall off the economy. Over 21 months, our nation was briefly pulled apart at the seams by inflation, a failed foreign war in Vietnam, a recession, an oil shock, and Watergate. By October 1974, the S&P 500 declined nearly 50%.
The echoes in today’s economy are shockingly similar.
We Hold Three Principals for Investing Success Through Every Market:
1. Our firm helps manage your investments with a long-term, goal-oriented focus. All asset allocation and investment decisions are made in the context of your plan, rather than current market manias.
It may seem dismissive to not react to every headline. However, history is littered with wars and crises, yet a diversified portfolio of high-quality companies has consistently provided long-term appreciation and growth of income.
2. We have repeatedly seen poor returns and investment failures by overreactions to short-term current events and pundit predictions. We plan to avoid this trap of short-term market timing.
The economic, market, political, and geopolitical chaos of 2020-2022 demonstrates that the economy can never be consistently forecast, nor the market consistently timed.
3. Therefore, the most reliable way to capture the full return of high-quality stocks is to ride out their frequent-but-historically-always-temporary declines.
We occasionally suggest you invest more during these times of low equity prices. No crisis has yet been permanent.
The Proof is in the Profits
It’s worth noting that, after the serial economic nightmares we’ve lived through since the pandemic hit early in 2020, the equity market rewarded patient investors.
The S&P 500 managed to close out 2022 higher than its level at the end of 2019:
3,839 (2022) versus 3,231 (2019), a gain of 18.8%, not including the dividends received along the way. Not great, but not at all bad for three years during which our entire economic, financial, political, and geopolitical world blew up.
What Lies Ahead in 2023
Jason Zweig of the Wall Street Journal describes inflation:
“Inflation is typically caused when a government tries to solve economic problems by burying them in newly printed money—thereby creating much worse problems by making daily life unaffordable, especially for the poor.”
As the comedian Henry Youngman said, “Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five-year-old can do it.”
The central drama of 2022—and likely, of 2023—was the Federal Reserve's late but very aggressive efforts to bring inflation under control.
The big question for 2023 is whether the Fed might tip the economy into recession.
Economic demand destruction normally follows rising interest rates like a shadow. Over the coming year, how this plays out will likely determine the near-term trend of stock prices.
While certainly a possibility, but we don’t believe (nor are we positioning for) a deep recession.
On the topic of interest rates,
It’s worth noting that today’s fed funds rate is shockingly average, when compared to history. After several interest rate increases in 2022, the Fed Funds rate ended December 2022 at 4.10%. The median rate from 1954 through today was 4.11%.
Stocks still averaged around 10% annually over that timeframe.
Above All, Remember: You and I are not investing in the macroeconomy.
This may be hard to remember every time the stock market climbs and falls. Instead, our portfolios largely consist of the ownership of successful companies—businesses that are refining their strategies daily to meet the needs of an eight-billion-person world.