Preparing for 2023
2022 was the year of rising prices and rising anxiety. Let’s face it - we dealt with a lot of shit. Yet here we are still chugging along…
Coming into the year, we expected the Federal Reserve to raise the Fed Funds rate by around 100 basis points (3-4 25 basis point rate hikes).
Instead, they raised the Fed Funds rate by about 450 basis points and at one of the fastest paces on record…
This rapidly increased the cost of borrowing for consumers and companies. Mortgage rates climbed above 7% during the year and home sales have declined for 10 straight months.
Stocks, particularly unprofitable high-growth technology companies, were pummeled.
Bonds had one of their worst years on record.
We experienced another crypto winter and (maybe) found the next Bernie Madoff.
While we have seen progress in the inflation number coming down, it still stands at around 7% (going forward, focus more on the month over month number).
Howard Marks put out a recent memo that makes the argument that we are undergoing a ‘sea change’.
We’ve had declining interest rates for the past 40 years. This created a huge tailwind for investors. They took on more risk to earn higher returns and created massive asset bubbles that don’t necessarily do well in the environment we are currently in.
This graphic summarizes the drastic changes we are experiencing:
The unemployment rate is still historically low at 3.7%. This is one of the key metrics to watch for a few reasons.
Investors will be able to withstand the volatility in prices and the markets as long as they are employed. But once the unemployment rate starts to rise, it typically gains momentum quickly and goes up very fast.
Once that happens, investors won’t be able to save, may cash out on investments, tap into their savings (which it seems like they are already doing), and scoff at mortgage rates that are around 5-6%.
Again, I’ll never pretend to know where we are headed or what 2023 has in store for us.
But here are a few key reminders to think of as we head into the new year:
Save what you can, while you can: I live in a percentage world. My goal is to save around 10-20% of what I make during a particular year. Some years are better than others, but that’s an internal goal. When things are going really well, it’s easy to take on more risk and splurge on big ticket items. Again, not necessarily a bad thing but always prepare for winter. There is a lag affect on these rate hikes and we may continue to see decreased spending from consumers and companies. This could impact you in your job. Focus on what you can control.
Best time to buy is when you have the cash available: Remember the buy the dip mentality? Well who is left even standing at this point. 2022 was a gut punch. Pessimism for the markets and the economy feels like they are at an all-time high. There will always be reasons to not invest. Once we tackle inflation, we will just transition to the next worry or problem. A lot of people we talk to want to wait it out and “get back in when things are better”. Again, please let me know in advance of when this will happen. But the best time to buy as an investor is when you have the cash available to do so.
Forecasts and predictions mean shit: At the end of 2021, I screenshotted a tweet that highlighted the S&P 500 year-end forecasts for 2022 by these brilliant financial institutions:
I hope you realize that they went 0/11. And it wasn’t even close.
Let’s look at 2023 predictions:
For the most part, they are all in the same general area and are not that optimistic for 2023. Let me remind you again, forecasting is a fools game. Don’t let outside noise derail you from your own personal plan.
Fighting Recency Bias: During 2020-2021, it was easy. Buy high flying technology names, focus on companies that can capitalize on the work from home movement, and you are all set. Well, 2022 was yet another year that humbled investors. With the exception of energy, most S&P 500 sectors were down for the year. Does that mean it’s time to load up on energy stocks? No. Investors love to give more weight to recent information than older information. Don’t chase. A blended portfolio that covers all areas of the market usually triumphs.
All bear markets suck, but they will end. For a lot of us, this is our first prolonged bear market. The 2020 Covid bear market was so short lived and the rally that ensued made us all not care.
When you become increasingly pessimistic and down and out on the market/economy, in my mind, you are betting against innovation not only here in the US but globally.
These tough years happen. Also, it’s rare to have back to back down years (that’s not a prediction, just a fact!):
As we head into the new year, remember to focus on the things that matter - your friends, your family, and your health.
Who knows what 2023 has in store for us. But we’ll be ready regardless.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
All investing includes risks, including fluctuating prices and loss of principal.