By Ryan O’Donnell, CFP® and Mike O’Donnell, CFP®
As we start a new year, our team wanted to take a moment to reflect on the past 12 months and to express our gratitude for your continued trust in our services. While 2022 was a challenging year for many, we’re pleased to report that our investments substantially outperformed our benchmarks, and we expect more of the same in the coming years.
Uncertainty about interest rates, inflation, and the economy throughout 2022, threw many strong headwinds at investors. Despite these challenges, which caused significant volatility in the first part of 2022, the year ended with a solid 4th quarter for stocks (up over 7% in the U.S. and even higher in international markets). The pressure we continue to see in the bond market, however, is driven by continued interest rate hikes by the Federal Reserve.
Looking at the fixed income side, we see that in December of 2021, the 3-month Treasury Bill was paying essentially 0% and the 10 Year Treasury Note was paying about 1.25%. Fast forward one year and the 3 Month Treasury is paying almost 4.50% (a 400% increase!) and the 10 Year Treasury is around 3.6% (also a huge increase). That’s not a misprint. The longer-term Treasury is paying less than the shorter-term T-Bill in a fairly rare occurrence called a “yield curve inversion.”
You will see a drop in value on your investor statement under Treasurys, but it's really an opportunity to earn higher interest. That’s because you can now earn between 4% and 5% interest on your cash risk free.
While inverted yield curves have a reputation for foreshadowing recessions, a recession doesn’t always follow a yield curve inversion as was the case in 2020. You might also be surprised to know that the market actually does well between the onset of an inverted yield curve and the market top that precedes any recession-induced drawdown in equites. The last four times the yield curve inverted, the S&P 500 was up an average of 28.8% before it peaked and it took on average 17 months to reach its peak. So, it’s certainly not time for investors to bail on stocks (see chart below):
The economy is not the market and vice-versa
It's important for us as investors to differentiate between the economy and the stock market. While it's easy to use the two interchangeably, remember the U.S. economy reflects what's happening today in terms of goods and services we buy and sell. The stock market forecasts the future profits and cash flow of publicly traded companies. Many of the stiff economic headwinds the news media tells us about every day -- layoffs, inflation, reduced consumer spending -- have already been priced into the market.
You’ve all seen the headlines screaming: “Stocks Close Out Worst Year since 2008.” It’s true. Stocks in the U.S. and abroad had their worst year since the global financial crisis (see top row of chart below). But even with those double-digit losses included, stocks, particularly U.S. stocks (as measured by the S&P 500) have delivered very strong positive returns to investors over the past five years (+8.79% annually) and past ten years (12.13% annually) See second and third row of the chart below. As always, “time in the market always beats trying to time the market.” I can’t think of a better time to stress the importance of sticking to you plan and keeping the long view in mind.”
As David Booth, legendary founder of Dimensional Fund Advisors wrote at the end of this report: “The purpose of having an investment plan is so you can relax. So, you don’t look at the market every day, stressing out and asking, “How’m I doing? How’m I doing?” Investors actively trading are not just potentially missing out on the expected return of the market—they’re stressed out, worrying about how the news alert they just received will impact their long-term financial health, and whether they can or should do anything about it.”
Conclusion
As OG clients know, a well-constructed financial plan assumes market corrections and outsize volatility will occur from time to time and is well positioned to handle those threats. We hope you’re staying safe and healthy. Again, if you have a question or just want to review your performance, please contact us HERE to schedule a quick meeting with either Mike or Ryan.
