From 1973 to 1982 the TV show Match Game aired on CBS. The game featured contestants trying to match answers given by celebrity panelists to “fill in the blank” questions. Panelists were often B-list (or lower) celebrities such as Brett Somers, Richard, Dawson, and Charles Nelson Reilly. The emphasis was on trying to create humorous answers for the audience.
An example of this can be seen in this YouTube clip. During an episode in 1975, host Gene Rayburn asked, “inflation was so bad that the little old lady who lived in a shoe, had to move into____?” The results are as follows:
While it would be very easy to focus on the inflation issue in calendar year 2022, I am instead going to focus my attention on several metrics that show how difficult a year it was in the stock market.
First, volatility picked up in a major way. The number of days where the stock market moved up or down by more than 2% reached a level that we last saw during the ‘08 Financial Crisis and its aftermath. As you can see in the chart below, during the first 11 months of the year, we experienced more 2% move days than we did during the Covid lockdowns of 2020.
’22 saw inflation at a higher level than we have seen in 40 years, an aggressive Federal Reserve Bank raising interest rates at its fastest pace in several decades, Russia invading Ukraine, ongoing supply chain disruptions, higher oil, gas, and utility bills, along with food shortages across the globe. Therefore, we were not surprised to see this pickup in volatility. In fact, we warned our clients in these missives to expect much higher levels of disruption and dislocation than they had seen in some time.
If it seemed that the news was perpetually dismal, you were right. As we can see in our second chart today, stocks had the fewest number of positive days for any year in more than a decade. In addition to that, growth stocks, the darlings of the last decade, which tend to do well when interest rates and inflation are low, got hit the hardest. This includes many of the technology and innovation stocks.
Stocks have had the fewest positive days over the past year in more than a decade.
For those of you who are expecting a quick bounce back in these stocks, we would encourage you to look at history to give us some guidance. We know that after the dot.com bubble of the late 1990s began to burst in March 2000, tech stocks underperformed for the balance of that decade. During that time, formerly unloved, emerging markets stocks began to soar. And, just as people were starting to embrace them in 2010, their performance, reversed course again in the aftermath of the Financial Crisis meltdown.
The lesson hereto is this: it is very rare for the darlings of the last market cycle to continue to do well in the next market cycle. As we shift to an era of higher inflation and higher interest rates, we would be very surprised to see the same stocks lead the next upswing, whenever it should come about, given our very different economic and market psychology environment.
We would like to offer you a little bit of optimism as we look toward the future. The broad stock market, as measured by the S&P 500, finished the year down nearly 20%. Indexes of small-cap and tech-oriented stocks did even worse. However, we would like to remind you that bull markets and bear markets come and go. As we can see from our final chart today, bull markets tend to be much longer in duration and much higher in return than the bear markets interspersed with them. In order to benefit from the bull markets, you have to endure the bears.
Nobody knows how much longer the bear market will last, or how far it will ultimately fall. We do know that selling after the market drops locks in losses. You also must be right twice with this strategy. When the market is lower and the news is worse, you must believe that you will have the emotional and intestinal fortitude to buy when things are on sale. Very few investors, professional or amateur, have shown the ability to do this successfully.
We expect inflation, higher interest rates, geopolitical risk and uncertainty to keep volatility at elevated levels in the new year. The CFP’s of Impel Wealth Management are dedicated to helping our clients by staying abreast of the financial headlines and news.
We will do our best to use our experience and wisdom to help you, our trusted friends and clients, navigate the choppy waters ahead. We hope that 2023 does not give us another Match Game, “fill in the blank” year. We will be here to walk with you through this as we continue “Moving Life Forward”.
© 2023 Jesse Hurst
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.