Goodbye, 2022, and good riddance. Don’t let the door hit you on the way out. What a brutal year for investors, as most asset classes lost money. In hindsight, I should have buried my money in the backyard or stuffed it under my mattress.
The S&P 500 is having its worst year since 2008. and long-term government bonds have dropped 25.5%, the worst year since 1926 and probably ever. Ever! The stock market posted stellar returns in 2021, rising 26.8%, and soared 72% since 2019. The momentum was on our side until the Federal Reserve raised interest rates by 1,700%. And who wanted to buy a T-Bill yielding 0.06%, which it did in January?
The Federal Reserve is trying to kill inflation by raising interest rates from .25% to 4.25%. The inflation rate is 7.11% after peaking at 8.58% in June. It is falling but still high, and the Federal Reserve will continue to battle the silent economic killer.
Consumer sentiment remains low, and investors are depressed. The US Index of Consumer Sentiment peaked on January 1 and has dropped consistently since the beginning of the year. The current index reading is 59.10, near the lows dating back to 1952, and it has averaged 85.8 for the past 70 years. It peaked at 112 in February 2000 before the S&P 500 fell 43%. You must be excited with the current number if you’re a contrarian or perpetual optimist.
Investors are bearish according to the recent US Investor Sentiment Percentage Bullish reading of 24.3%. 75.7% of investors are negative and expect stocks to fall further, and 24.3% are hopeful they will rise. Last April, the index peaked near 60% as most investors were optimistic about the future direction of stocks. Investors now expect markets to fall more, with little hope for the future. However, a low reading is bullish for stocks.
Cash is attractive relative to falling stocks and bonds, and it’s now possible to buy a one-month US T-Bill yielding 3.8%. Investors love T-Bills because they’re guaranteed and don’t lose money if held to maturity, and they provide relief to weary investors in the near term, but they’re no match for stocks in the long run. Since 1926, T-Bills averaged 3.24%, and stocks produced an annual gain of 10.2%. A dollar invested in T-Bills is now worth $21.97; for stocks, it’s $12,231. Inflation averaged 2.95%, so your net return on T-Bills was 0.29% before taxes. Cash is a short-term gain but causes long-term pain.[1]
I’m excited for 2023 because I believe in free markets and love owning great American companies. I’m also an optimist fond of diversification, asset allocation, and financial planning. And hope springs eternal.
Merry Christmas and Happy New Year! May God’s light shine brightly on you and your loved ones.
What a wonderful thought it is that some of the best days of our lives haven’t even happened yet. ~ Anne Frank
December 15, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
[1] Dimensional Fund Advisors Returns Web Tool from January 1926 to November 2022.