This week, I am interrupting our weekly thoughts with an annual piece that I plan on writing each January going forward. The purpose of this piece is to remind us all of some of the general principles we try to utilize in the advice we give as well as some observations about the current investment and economic environment.
First of all, we should always focus on long-term, goal-based and plan-driven decisions. We believe that lifetime financial and investment success comes from acting continuously on a plan. Likewise, we believe substandard results, and even lifetime failure, comes from reacting to current events.
The unforeseen economic, market, political, and geopolitical chaos of the three years since the onset of the pandemic demonstrated conclusively that the economy can never be consistently forecast nor the market consistently timed. Therefore, unless your circumstances have changed, we believe that the most reliable way to capture the full return of investments, especially equities, is to ride out their frequent declines. These will continue to be the bedrock convictions that inform our investment policy, as we pursue your most important financial goals together.
Relentless and unrelieved pressure continued in 2022 with the central drama of the year being the Federal Reserve’s belated but very aggressive efforts to bring inflation under control. US equity markets, after rising seven times in the nearly 13 years between the trough of the Global Financial Crisis (March 9, 2009) and January 3, 2022, sold off sharply. At its most recent trough in October, the S&P 500 was down 27%. It should also be noted that US bond prices had their largest declines in modern history in response to sharply higher interest rates.
It seems to us more than a little ironic that, after the serial nightmares through which it suffered since the onset of the pandemic early in 2020, the S&P 500 managed to close out 2022 somewhat higher than it was at the end of 2019 (3,840 versus 3,231, a gain of ~19%). Not great, but not at all bad for three years during which our entire economic, financial, political and geopolitical world was thrown into an unprecedented environment.
If anything, this tends to validate our core investment strategy over these three years, which has generally been: stand fast, tune out the noise, and continue to stick to your long-term plan. That continues to be our recommendation, and in the strongest possible terms.
The burning question of the hour seems to be whether and to what extent the Fed, in its inflation-fighting zeal, might tip the economy into recession at some point – if it hasn’t already done so. Over the coming year, the way this plays out may determine the near-term trend of equity prices. But our position continues to be that this outcome is simply unknowable, and that one cannot make rational investment policy out of the “unknown.”
That said, we continue to believe that whatever it takes to put out the inflationary fire will be worth it. Inflation is a scourge that affects everyone in our society. If recession proves to be the painful remedy required to destroy it, then so be it.
Although this may be hard to remember every time the market gyrates (and financial journalism shrieks) over some meaningless monthly economic datum, we are not investing in the macroeconomy. Our portfolios largely consist of the ownership of enduringly successful companies – businesses that are even now refining their strategies opportunistically to meet the needs and wants of an eight billion person world. In other words, we like what we own.
As we always say – but can never say enough – thank you for being our clients. It is a genuine privilege to serve you.