Now that 2022 is in the history books, we thought it would be worthwhile to pause for a moment and reflect back on the past 12 months before we turn our attention to the next 12, even though many investors would just as well forget about last year!
At Infinium, on the other hand, saw many things fall into place for us and our clients. Strangely enough, this was one of the best years of performance we have booked in relation to the investment landscape. So in many respects, the way 2022 unfolded played right into our hands.
We are stout believers in the long game whereby you buy high-quality investments and let them ferment, yet there are times when even great investments go down over the course of a year. The stock portion of our portfolios, by-and-large, did not produce a positive result in 2022, to be clear. However, we were able to print a positive return in the area that we broadly call “Alternatives.” Those of you who have been with us for a while are more than familiar with this term and how these strategies help you as an investor. Thank you 2022 for proving us correct in keeping Alternatives in our model portfolios and rewarding us for doing so!
Too, one of the pillars of traditional investing is to have bonds (or Fixed Income) in a portfolio to offset risk that you might have on the stock side of the mix. Like 2021, bonds produced a negative return in 2022. This is fairly unprecedented and a phenomenon we have not seen since the 1970s. Call 2022 the Worst of All Worlds for investors who had a very traditional mix of just stocks and bonds in their portfolios – the average loss was somewhere in the -18% range! We spoke to more than a few prospective clients last year who might have been in their 60s or 70s, with a very moderate risk level – that were seeing losses in this range and completely unsure of what to do.
With inflation running hot, 8-9% for most of the year, keeping your money in cash was a guaranteed loser as well. Again, even though money markets had been yielding virtually nothing for the past decade, inflation at ~2% wasn’t eating you alive. 2022 was the year that the 3-headed monster of negative returns in stocks and bonds + inflation clobbered the average investor.
Finally, over the past 12 months we made four bold moves to the mix of investments for many of our clients – two times lowering risk and two times increasing it. 2022 saw extended trends that we were able to capitalize on, although making shifts to a portfolio mix is hardly an exact science.
In retrospect, making changes to our investment mix in 2022 had far more to do with the fact that so many investors got ‘off-sides’ and drove prices too far in one direction or the other. Through mid-year, investors were too negative on rising interest rates and sold off both stocks and bonds to a level where it wasn’t hard to see that they were indeed a bargain. By August, just the opposite – too much belief in the Fed coming off of the brake and easing up on their interest rate hikes. In October, we saw the most negative reading on investors’ outlook for the future since the Great Financial Crisis of 2007-09! This created a chance for us to increase risk into the close of the year, only to find us scaling things back right as the proverbial Santa Claus rally was supposed to take place. If nothing else, market moves of 2022 kept us on our toes.
Our final thought on the past is that 2022 proved how important it is to limit losses in your portfolio. By keeping the downside to a minimum, you don’t feel wary of taking on risk, and you are ready to bargain hunt when those opportunities present themselves. Most investors who experience all the losses when markets are lower rarely ever find the intestinal fortitude to increase their risk when things look bad, at the point of maximum gain potential. Rather, they continue to hunker down and protect, having too much cash as markets begin their recovery. This dynamic cannot be overstated – having the mindset to go against the crowd when the odds favor to do so is the single most important part to winning with your investments. Last year gave us several chances to increase risk and bargain hunt, and fortunately we made that happen.
2023: The Year Ahead
What we always find interesting about the soothsayers who try and predict the future for markets is how influenced they can be by what just happened. They are continually looking in the rear view mirror for clues to the road ahead. Although where we just came from does help inform us about the outlook moving forward, the trap is to rely too much on recent events.
If you are paying attention to the media outlets, it’s no surprise that the chorus of so-called experts are quite negative on 2023. Many of these folks were sounding the “all-clear” signal at the beginning of 2022 mind you. They incorrectly extrapolated the massive gains of 2021 into the future because, well, that’s a very safe way to make it sound like you have something valuable to say.
Our take on 2023 boils down to a few data points that we believe will be the main drivers of prices. These are not the traditional measures that you hear so often by the talking heads – interest rate, recession, company earnings, etc. Rather, now more than ever, we believe that the better way to rationalize an invest strategy has more to do with what other investors are doing (or not doing).
Markets today are highly emotionally driven, and you can’t blame them – the central banks around the globe have gone full-stop in their endless money printing and support. This is a sea change from the past 20 years, give or take, and the fact that investors are having a hard time absorbing this change is not unexpected. Our hope is that the governments around the world play less of a roll in markets from here on out, although much debate remains about their actions. In a way, we hope they get it right and continue to let market forces operate in their natural state. Just like in nature, when you mess with it too much, you end up creating far more problems than you solve. Central banks provide valuable stability, especially in times of great dislocation, and that is a good thing. However, the place we find ourselves in today is one where they are struggling to get out of the way, and that has created a cloudy investing environment to say the least. Hopefully, this is the year that the investors support less government and the folks in charge continue to acquiesce.
Patience, as always, will serve investors well in 2023. Here at Infinium, we try to focus on getting the next big move in the markets right, rather than trying to look too far down the road. As it sits today in mid-January, markets have seemingly found their legs and a rally has been in order since the calendar flipped. Just how long this lasts is anyone’s guess, but for the optimist, green on the screen is a welcomed sight against a 2022 that was mostly in the red. With a lot of cash on the sidelines and investors largely licking their wounds from last year, it’s a stronger-than-expected rally that would sting those folks the most, rather than another leg lower. The first month or two of 2023 could very well prove to be a missed opportunity for those clinging to the pain of last year.
Peering into our crystal ball, we see a bull market in negativity continuing this year, which curiously enough is the setup for rallies that defy logical reasoning. As long as Main Street and professional investment managers are overly cautious, we believe markets will avoid the type of downturn we saw last year. This is because, cautious investors are already carrying a lot of cash and are under-invested. Of course, anything can happen, particularly with the geo-political upheaval we see around the globe today. But markets have a way of dealing with bad news, and it wouldn’t surprise us if the headlines that drove prices down in 2022 (inflation, tail end of COVID, war in Ukraine, etc.) are not the market-moving news items of 2023.
Overall, balance will remain a key element to success this year, as well as being nimble and adjusting your mix as conditions warrant. We believe the Alternatives space has room to run and will be a necessary piece to stabilize the volatility of your portfolio. Additionally, the areas that really took a beating in 2022 might show surprising strength as inflation cools and new worries come to the fore. Precious metals had a relatively quiet 2022, yet are showing convincing strength since early December. This could ultimately be a breakout year for gold, in particular, as investors continue to lose faith in traditional fiat currencies including the mighty U.S. dollar.
As always, please feel free to reach out as we very much appreciate your trust in us to navigate these wild times.
Happy New Year from the entire Infinium team!
Opinions expressed in this article are meant as general market commentary and not a recommendation to buy or sell securities or follow any investment strategy. Always consult your own financial advisor before making any investment decisions.