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Q4 2022 Commentary: Surprise, Surprise! Thumbnail

Q4 2022 Commentary: Surprise, Surprise!

Pine Haven Investment Counsel, Inc.

Paige Johnson Roth, CFA®

What a year in the financial markets. Nearly all asset classes were down, and surprisingly bonds did not provide their usual ballast to the downdraft in equity markets. Interest rates increased as the Federal Reserve (the Fed) has raced to tame inflation by raising rates. The increasing inflation rate affected both the stock and bond markets adversely. The stock market had its worst year since 2008, snapping a three-year winning streak with the S&P500 index down 18%. And since interest rates rose this year, bond markets were down (bond prices work inversely to interest rates). The Bloomberg Aggregate Bond Index was down 13% for the year.

At this point last year, after three very strong years in the stock market, many on Wall Street were predicting another banner year. They obviously were incorrect. What no one could predict was the war in Ukraine, which resulted in energy price increases. The energy price increases were stacked on top of the existing price pressures from the tight labor market and supply chain issue, and inflation rose. Therefore, the cost of most everything has increased in the past year. Additionally, COVID is still lingering around creating disruptions. There will be unpredictable events this year as well.

One silver lining is that cash, money markets and bonds are now paying more in interest than they have in at least a decade, so savers are getting paid again. The Zero Interest Rate policy since the Great Recession is now over. In the past decade, many investors went on mad dash of risk taking, as they did not want to park cash in zero interest savings accounts. “Irrational Exuberance” abounded and people plunged into risky assets as they wanted returns on their money. Currently, high yield savings accounts are getting around 3%. And 1-year treasuries are yielding around 4.6% - not quite the 6-8% of the past (1990s), but better than zero. The rates could inch a bit higher if the Fed raises rates again. As always, it is hard to predict the short-term market movements. The only reliable prediction is that the future will be uncertain and there will be economic and political surprises – both positive and negative.

Wall Street makes plenty of predictions – does that make them look smarter? And thinking about what will move the markets and the economy is fun to do. It is better to instead focus on the long-term prospects. The fact is that no one can predict what will happen next with financial markets, so embrace the uncertainty, stay humble, remain calm, and diversify your investments.

Responsible investors can use the words of Jeff Sommer as a guide, “It’s possible to be intelligently optimistic about financial markets over the next few decades, without knowing where the markets are heading over the next year.”2

Or there is this quote from the astute Yogi Berra, “It’s tough to make predictions, especially about the future.”

So prepare to be surprised by events and market reactions and then be surprised that you were surprised.

1 Former Fed Chair Alan Greenspan made this statement famous in a speech in late 1990’s referring to the Internet/Dot-Com bubble.

2 New York Times, 12/18/2022 Business Section Page 5