For investors, 2022 was quite a mess. The market trended lower all year, and every major stock market saw negative returns.
| • S&P 500 | -19.4% |
| • Nasdaq | -33.1% |
| • Small Cap Index | -21.5% |
| • International Index | -20.0% |
Big Tech, which carried the market in recent years, came back to earth in dramatic fashion.
| • Amazon | -51.00% |
| • Meta (Facebook) | -66.00% |
| • Netflix | -50.64% |
| • Microsoft | -28.09% |
| • Alphabet (Google) | -38.72% |
| • Tesla | -65.00% |
The bond market provided no solace to investors. Every few decades, the stock and bond markets go lower together, and 2022 proved to be one of those years.
| • U.S. Aggregate Bond Index | -13.01% |
| • U.S. 30-Year Treasury Index | -31.00% |
| • U.S. Treasury Bond Index | -10.70% |
For speculators 2022 was merciless, delivering crushing blows. Hundreds of cryptocurrencies lost 100% of their values, as did thousands of NFTs. Many will never recover their value, resulting in permanent losses.1
| • Crypto Index | -79.98% |
| • NFT Index | -87.92% |
And those popular internet-craze meme stocks finally returned to their true market value.2
| • Bed Bath & Beyond | -83.44% |
| • AMC | -84.65% |
| • GameStop | -51.69% |
| • OpenDoor | -92.30% |
And 2022 illustrated, once again, that Wall Street is exceptionally terrible at forecasting. Last year, nine of 10 investment houses predicted stock market gains in 2022. Instead, the stock market had its worst year since 2008. But 2022 wasn’t the only year forecasters have been wrong. In fact, forecasts have proven to be far worse than arbitrary guesses. From 2000 to the present, the average Wall Street forecast, from the likes of Goldman Sachs, JP Morgan and Morgan Stanley, has missed its target by an average of 13%. Given that the stock market averages 7% to 10% per year, depending on what period you want to measure, a 13% miss is, shall we say, statistically significant.
Short-term stock market forecasts can best be summarized in one word: worthless.
Of course, it would be wonderful if bullish predictions could be relied upon, given these 2023 S&P 500 forecasts:
| • BMO | 4300 |
| • JP Morgan | 4200 |
| • Wells Fargo | 4200 |
| • RBC | 4100 |
| • Credit Suisse | 4050 |
| • Goldman Sachs | 4000 |
| • HSBC | 4000 |
| • CITI | 4000 |
| • Bank of America | 4000 |
| • UBS | 3900 |
| • Morgan Stanley | 3900 |
The S&P 500 is currently at 3824.14.
So, what should we make of all this? For the wise investor, these are our five clear takeaways:
1. A planning-led investment approach with a quality, diversified portfolio is a solid path to surviving a bear market and ultimately thriving.
Long-term financial success requires having short-term income needs met from portfolio income or parts of the portfolio outside of the stock allocation. This is what makes the financial planning process so important. It allows us to work with you to ensure we construct a portfolio allocation that can meet your income needs through any market. Instead of wasting our time guessing which year the stock market will be negative (which, as we covered, is a worthless exercise), we invest knowing that the stock market is negative about one in four years, and portfolios should be constructed with this reality in mind.
Strong, diversified investment portfolios have an extremely high probability of total recovery and a path to a new high. Clients that have followed our recommended portfolio allocations tend to see a total recovery from every bear market and have seen their portfolios eventually move on to new highs. It’s important to note that the key to this success is owning a diversified portfolio made up of quality holdings — and helping to ensure that the portfolio is never at the mercy of the market.
2. Investors that piled into hot trends, investing in holdings that have no reasonable expected earnings, will likely never recover.
When speculators buy assets that don’t have a reasonable expectation of future earnings, they’re really playing a game of hot potato. These speculators are buying assets in the hopes someone will pay more for them, not in the hopes of actually collecting future profits. These sorts of investments tend to not end well, and we have warned about them multiple times over the last few years. In 2022, the party came to a screeching halt. It’s likely most cryptocurrencies, NFTs and meme stocks will never recover. For investors in those spaces, this is not the time to “buy the dip.” It’s over.3
3. The stock market cannot be timed.
The green line is the growth of $1 from 1980 to 2019 if you bought U.S. stocks at the official end date of a recession and sold at the official start date of the next recession.
The blue line is the growth of $1 if you simply bought U.S. stocks and ignored everything.
Even if you could predict the beginning and end of a recession, stock market returns don’t tie directly to the economic cycle. Don’t bother wasting energy on this worthless endeavor.
4. The market is going to go up in most years, down in some years and up over time.4
There are so many things that factor into stock market returns that year-to-year predictions are irrelevant, and acting upon short-term predictions is far more likely to cause harm than improve returns. We do know the odds of positive returns in any given year are about three out of four, and the odds move greatly in investors’ favor when the time horizon is extended. This is why earned income, other income, portfolio income, bonds and other investments should be used to ensure the investor doesn’t need to sell a significant amount of stocks during bear markets. Ultimately, it’s time in the market, not timing the market, that favors the disciplined investor.
5. When the market does recover, it tends to recover its losses at a fast pace.5
There’s more good news for the disciplined investor. As clouds are lifted and the markets begin to recover, they tend to do so at a rapid pace. While we don’t know when the bear market will subside and give way to the next bull market, we do know recoveries are often swift. After the market bottoms, it recovers at an average rate of 41% over the following three years and 71.8% over the following five years. Of course, we never know when the market has bottomed until it’s well in the rearview mirror.
The disciplined investor knows that short-term stock market returns are unpredictable, long-term returns are fairly predictable, investment allocations should be constructed to meet their personal needs and they should own quality, diversified investments with a reasonable expectation of future earnings. For those investors, the future continues to look very bright.
Footnotes:
- Who would have ever thought something that produces absolutely no income and has no inherent value would eventually collapse?
- It turns out I have better odds of being invited to do a TikTok dance with my daughter than an investor has of making money with hyped internet stocks. And my odds of getting that invite are very close to 0%.
- Unless you’re the kind of investor that likes to double down when dealt a 16 while playing blackjack.
- Duh.
- Up until now, I’ve been quite the Debbie Downer, but in reality the future looks bright for the long-term investor.
