Assante Market Update: Bring on 2023!

Happy New Year all! May the new year bring good health, happiness and positive markets in 2023 with no new wars or pandemics!

As for 2022 – nice knowing you….

Okay, that may be a bit harsh. Tami and I welcomed our second baby in September so I can’t write off 2022 completely. Not to mention that we live in a safe country, family get togethers are back, travel has returned, my health is good and we are certainly in a better place as a whole as it relates to the pandemic. So lots to be thankful for.

That said, from a market perspective, good riddance!

This email is going to start by looking back at 2022, and give you some direction on successfully navigating 2023 and beyond.

Looking back at 2022

There was no shortage of themes in 2022. Here are a few of my favourites that I came across:

• The Great Inflation
• The Bond Bust
• The Year of Peaks – peak inflation, peak yields, peak Fed aggressiveness, and at times what felt like peak uncertainty
• The true selfishness of the rich and powerful – Putin invasion of Ukraine, Musk takeover of Twitter, Sam Bankman-Fried FTX Crypto Fraud (allegedly)

We had inflation hit a 40-year high, interest rates rising at the fastest pace in history, crypto collapse, speculative tech companies getting slaughtered, supply chain issues, war, China’s zero Covid policy, energy crisis, housing market slowdown, oil skyrocketing, bear market for stocks.

This is to name a few.

Or if you prefer to take a more glass half full approach:

• The excess froth has left the market
• Your cash can finally earn you something
• Bonds look more attractive than they have in decades
• Expected returns are now higher
• US regained all jobs lost in the pandemic (Canada did that in 2021)
• Wages grew particularly for low/middle income earners

In my opinion, 2022 will be remembered as the “Great Inflation” which forced the Fed, arguably the most powerful economic institution in the United States, to raise rates at the fastest pace in history which ultimately led to bonds, the part of your portfolio that’s supposed to protect you, to simply not work. To find out why, check out –https://surroundwealth.com/savers-rejoice/

2022 was anything but average. We’re living through history. 2022 will be written about and analyzed for years to come. We just experienced one of the worst years ever for the US stock market.

• 2022 was the 7^th worst loss since the 1920’s for the US Market
• The US government bond benchmark was down more than 15% in 2022, making it the worst year ever for bonds
• A diversified balanced (60% equity 40% income) portfolio experienced the third worst year ever (behind 1931 and 1937)
• Only the 5^th time since 1928 that both stocks and bonds were negative. They have never both fallen 10% of worse in same year (which occurred in 2022)
• Only 43% of the trading days in 2022 were positive (US Market)

I could go on and on with the stats but you get the point. 2022 was a terrible year for financial markets.

It didn’t matter, whether you were the conservative investor or the aggressive investor, 2022 was tough.

Is the market broken? – No.
Do markets go up in a straight light? – No.
Is this what we sign up for in order to get our 5-8% over time? Yes.
Does the market increase overtime? – Yes
Has the majority of the last 10+ years been fantastic for returns? Yes.

This is how it works. The market increases in value and every so often there is a large correction that wipes out a year or two of returns. We then regroup, recover and rebuild. We eventually hit new highs, we all feel great, then something comes along that wipes out a few years of growth, we feel terrible, we regroup, recover and rebuild and the market eventually hits new highs. The timing changes but the cycle continues.

I know we would all prefer growth, growth, small decline, growth, growth, small decline or better yet, 6-7% each year, but that’s not how it works.

The average return in the US since 1950 is about 9% (let’s call it 8-10%), yet the average has only happened four times.

You may look at your statement and see that you have achieved your expected average rate of return but getting there was anything but average.

The long-term road to average comes with many years of outsized returns, many years of weak or negative returns and a few years of average returns.

Navigating 2023 and Beyond

Strategy 1: Zoom out

You’ve heard us say it over and over again but I can’t stress how important it is to zoom out, especially now. There is so much noise as it relates to the economy, markets and the world. Trying to understand what’s relevant and what’s not, how they are all connected and ultimately how that affects markets is not only impossible but not worth it. If you don’t believe me, here is a quote that stuck with me from legendary investor Charlie Munger (Buffett’s long-time partner and friend)“If you’re not a little confused by what’s going on you don’t understand it”

In 2023, the noise is sure to continue. You’re going to continue to hear about inflation, interest rates, geopolitical issues, employment rate, recession and a whole host of new things that haven’t happened yet. To make it even more confusing, in many cases seemingly good headlines can be bad for markets and vice versa.

To combat the futility of this noise when it comes to investing, we need to take a step back, zoom out and remind ourselves what we are investing in. We are not investing in interest rates, inflation, war, and recessions. We are not investing with a 6-8-12 month time horizon.

We are investing in growing companies with products and services that people use, that have strong balance sheets, that have real earnings and cash flow, with great people running them.

Strategy 2: Stop trying to predict markets in the short term

If there’s one debate that can be settled, it’s the one about market predictability and ultimately market timing. The stock market is inherently unpredictable in the short-term because the world is unpredictable.

How many people at the end of 2019 were forecasting a pandemic in 2020 that would cause lockdowns, millions of people working from home, the worst quarterly GDP print in modern economic history and the biggest government spending response since World War II?

Coming into this year, how many people predicted the dictator in Russia would invade an innocent country causing upheaval in the food and energy markets? Or the highest inflation rate in 4 decades? Or the Federal Reserve raising rates at the fastest pace in history while actively rooting for the stock market to go down?

This wasn’t on any of the 2022 outlooks I perused.

Check out the 2022 stock market predictions by the biggest and brightest:

The range of these 14 forecasts was 4,400 to almost 5,400.

The S&P finished the year just over 3,800.

The point here is not to shame the Wall Street strategists who make forecasts.
But when it comes to the short term, it is truly anyone’s guess and the range of possible outcomes is wide.

This is the very reason you create an investment plan in the first place.
If you knew what was going to happen every year there would be no reason to have a plan in the first place.

The planning process should include setting realistic expectations, playing the probabilities and making course corrections along the way.

Strategy 3: Identify & Avoid Anchoring Bias

They say a picture is worth a thousand words…

This is by FAR the number one conversation I had with clients this year.

First, what is anchoring bias? Anchoring is an irrational human bias towards an arbitrary benchmark.

We all do it whether consciously or subconsciously, including myself.

A perfect example is gas prices:

• When gas prices increased from the pandemic low to $1.50/L, I was flabbergasted, annoyed
• In my mind, I had gas prices anchored to the average $1.00 – $1.10 that I was used to
• I filled up last week at about $1.45 and I felt that this was reasonably priced as my mind is now anchored to the pandemic highs of $2+.

The same can be said about mortgage rates:

• Mortgage rates increased from 0 to 3%, many people were shocked (understandably).
• Since that time mortgage rates reached levels well above 5% but have since come down.
• I recently spoke to a friend who locked in 3.95% and he said “at least I didn’t get the 5.5% I saw a few weeks ago”. He feels like he came out ahead because he’s anchored to the 5%+ rate.

Same holds true for inflation.

• In 2022 markets tanked when the inflation numbers came out at 7-8-9% since we are used to seeing sub 2%.
• Over the last few months of 2022, the market cheered inflation of 7-8% because it was coming down from the peak of 9.1%.
• The market had clearly anchored to higher amount.

You get the point. This is exactly what happened to investors in 2022.

We all anchored to our December 31^st 2021 market value on our statement and assumed that money was in our pocket.

And when we looked at our statement in 2022 and noticed it was below our anchor value, it felt like a big loss, when in reality, if you’ve been investing over the past 10 years, you’ve almost certainly gained significant value.

Dec 31^st 2021 is the equivalent to the $30 point in the picture above. The investor feels like they are down but in fact they’ve doubled their money over time.

Your statement is simply telling you the value of your portfolio IF you sell it today, and in almost all cases, you are not selling 100% of your portfolio today.

Your statement is as relevant and someone knocking on your door everyday and telling you the value of your home. Unless you’re selling, you wouldn’t pay much attention to this.

It’s also important to mention that your portfolio is not investing based on the Gregorian calendar. You are not trying to get the best return per calendar year with a sudden reset on January 1^st.

My advice – forget about comparing your market value to the end of the previous calendar year or any one year period for that matter. If you want to anchor to something, zoom out, anchor to the amount you invested or anchor to your net invested capital. Most portfolios have an average 7-10 year recommended holding period, so anchor to 7-10 years ago.

Ask yourself, what did I start at, where am I now? Or better yet, ask yourself, am I meeting my investment objectives?

I can bet that in most cases your portfolio has held up quite well compared to where you started including the challenging years.

In Closing

I’m not going to fall into the trap of trying to predict what will happen in 2023.

I read 40+ outlooks from various strategists, financial institutions and economists and I can tell you that market cycles do not stop at year-end. As much as I want to flip the page onto the 2023 and start anew, that’s not how this works.

Expect a bumpy road. Expect inflation, interest rates, recession, jobs market, and company earnings to be buzz words. Expect rallies as the market cheers certain data points and expect corrections that will continue to test you.

Remember:

1. The 3 Strategies: zoom out, refuse to adopt a market timing mentality, identify and avoid anchoring.
2. We buy good companies with intelligent portfolio construction, and we weather the storm because “this too shall pass”
3. You are investing in profitable companies that will continue to grow for the next 5-10-15+ years, that offer real products and services, that have cash flow, strong balance sheets and great people running them.
4. You have a team that is looking at your portfolio on a daily basis and making adjustments every day.
5. We invest right along side you. If you win, we win.

I leave you with Napoleon “A genius is the man who can do the average thing when everyone else around him is losing his mind.”

Look forward to connecting in 2023! On behalf of Surround Wealth Advisors,

Adil Mohammed, CFP®, CIM®, FCSI®
Wealth Advisor
Assante Financial Management Ltd.