“The S&P 500 closed out 1972 at 118. As I write, in the runup to Thanksgiving, it has just closed above 4,000. Let me say that again: The S&P 500 has gone down by about half three times in your lifetime and is now up about 34 times since the eve of the first of those three epic bear markets.” –Nick Murray
The Year In Review
Let’s take a brief look at 2022. The year when the Federal Reserve raised interest rates at a faster pace than at almost any time in history. As interest rates go up, bond prices go down. And down they went—at a percentage loss that is unheard of for bonds. So, it was a bad year for the bond fund managers.
Similarly, as interest rates went up, the high-flying technology companies’ stock prices declined. The reason for this is that equity investors want a return on their investments. When they look at a fast-growing company, plowing all the profits back into their growth, they are looking at a company that plans on big profits in the future. The longer an investor has to wait to receive the profits, the more they have to discount the value of those profits. A dollar in 10 years is not as valuable as a dollar today. The “discount rate” depends on interest rates. The rise in rates caused a decline in the value of these companies—more so than other companies, already profitable today.
And then there is the pain we all feel at the grocery store: inflation. For the first time in a very long time, we suffered through substantial inflation in 2022. I know our grocery bills grew in the Frank family, even though the number of family members in the house declined (thank you, CU Boulder!). Needless to say, companies that are highly dependent on consumer expenditures, and/or could not raise their prices quickly, suffered more than companies have pricing power and could pass on the prices to consumers.
Reasons For Optimism
In spite of all this, I remain incredibly optimistic. In fact, with the recent decline in equity prices, I believe we may have increased the likelihood of higher returns on equities in the future. Furthermore, we have now reached a point where bonds are potentially paying an interesting income. And so, investors walk into the new year with a more solid set of options than we had just a few months ago. Make sure to talk with your wealth advisor about your situation. You likely will find them confident.
And, for more perspective, I refer back to the writer whose quote began this Periscope blog. The experience of our lifetimes is “an astonishing testimony it is to the resilience of America’s economy” and the companies in which we are invested. You might want to print out this month’s Nick Murray article, available in our newsletter, and bring it with you to your next appointment with your wealth manager.
Create another beautiful day—and let’s make 2023 an amazing year!