I was surprised to find that it is now 30 years since the late Queen Elizabeth II used this memorable phrase to characterize a particularly awful year for her family. Probably we should use the epithet sparingly, saving it for truly horrible years, but even if we do, 2022 fits the bill. As the chart below shows, it easily makes the top ten list for bad stock market returns:
Nor was there any relief for those who diversified their portfolios by putting 40% into the traditional safe-haven asset, bonds. A portfolio of 60% stocks and 40% bonds lost 16.9% in 2022, the 3rd worst performance ever for such a portfolio, and the worst return in the post World War II era.
There are of course a number of well-understood reasons why 2022 was such a bad year for investors. The main ones:
- The continuing COVID pandemic which, without much fanfare, killed around 12,000 Americans and 600 Canadians per month in 2022. About 1,100,000 Americans have died from the disease.
- The disruption in global trade arising from periodic lockdowns in China, which roiled supply chains and caused shortages of key materials and finished goods pretty much everywhere.
- The war in Ukraine, now by far Europe’s most savage and destructive war in the last 75 years.
- The decision by central bankers in North America and Europe to fight inflation through rapid increases in interest rates, causing prices for bonds to crash.
- Reversion to the mean for stocks. Out-sized gains in 2020 and 2021 had caused the prices for many stocks to rise above their fundamental value; a return to more normal metrics in this case is not very unexpected.
Looking backwards is much easier than forecasting. We can, in retrospect, see exactly what happened last year, and we can provide all kinds of reasons why. Guessing what is going to happen this year is much harder. The world is simply too complex, and all predictions for the future are by their nature, highly uncertain. That being said, we are entering 2023 with some optimism, for the following reasons.
- We think predictions of a deep recession in 2023 are over-blown. We see considerable strength in the labour markets in both Canada and the US, with unemployment rates very low, and job openings continue to exceed the number of unemployed persons. Canada is increasing immigration to help employers find qualified staff; this is not something that happens in a shrinking economy. Moreover, it is important to remember that the stock market and the economy are two very different things. It is not at all unusual to see the stock market advance even as the economy stalls. The markets are leading indicators and will often surge just as economic conditions appear to be at their worst.
- Consumers keep paying their mortgages, car loans and credit card debt. Although interest rates have risen about 4%, there are few signs of distress and the proportion of loans that are in default is near a record low. Most consumers saved money during the two years in which COVID restricted spending on travel, entertainment and leisure activities and these funds are available for debt repayment. There is no sign of a crisis in the housing markets, although sales have slipped and prices are down around 10% to 15%, depending on the market. Given the huge upsurge in prices in the past few years, this is hardly surprising.
- Prices for some of the best companies in the world are now very attractive. For example, Amazon, Apple, Google and Microsoft, the so-called “mega tech” companies are all trading well off their levels of a year ago. They all remain highly profitable. Most of the Canadian banks and insurance companies are also at very low prices given their earnings and dividends. History shows that the time to buy great companies is when they are unpopular. The stock market remains the only place in the world in which people are happier to buy things when their prices are high, not low. Buck the trend. Buy low.
- Dividends paid by our portfolio companies rose sharply during the year. This is good news for a number of reasons. First, dividend payments form an important part of the investment return, and particularly so in years in which stock prices are down. Second, unlike stock prices which rise and fall every day, dividends are tangible. They can be spent, and they can support a lifestyle. Finally, and most importantly, when a company raises its dividend it is telling its shareholders that it is confident about the future. No company ever likes to cut a dividend, so increases come only after hard thought and discussion by the company’s Board. During 2022, of our 38 dividend-paying companies, no fewer than 34 raised their dividends, on average by 9.1%.
- Over the past four years we have discouraged our clients from investing too heavily in fixed income. The returns were simply too low, with investment grade bonds paying only around 2.5%. Now things have changed and yields in the 5% range are available. With these new higher interest rates we are able to reduce risk in portfolios and lock in reasonable returns over the short to midterm. The horrible bond market in 2022 was a once in a lifetime phenomenon which will not be repeated in 2023.
- Finally, we are seeing a very welcome reduction in the huge amounts of speculation that were a feature of the market in the past three years. From cryptocurrencies to Special Purpose Acquisition Companies (SPACs) to over-hyped new market entrants like Beyond Meat and Peloton, amazing amounts of money have been made and lost in short periods of time. The total value of all cryptocurrencies peaked at $3.1 trillion last year. It is now below $800 billion, down about 75%. Beyond Meat stock peaked at $235 and is now $13. Peloton hit a high of $163 and is now $9. Less speculation is good for our clients, as more money gets directed to fundamentally sound, profitable companies, which is what we buy.
During 2021 and early 2022 I remember conversations with many clients in which we expressed our surprise at the great results we were seeing, even in the face of COVID and problems in world trade. Sadly, in 2022 we gave back a lot of the gains we made in 2021. However, after one of the worst market years in living memory, most clients will find that in the two-year period from Dec. 31, 2020, to Dec. 31, 2022, their portfolios are pretty much flat. It may not be great, but its not really horrible, either.
All of us at Baskin Wealth Management wish you a happy, healthy and profitable new year.
David Baskin on BNN Bloomberg’s Market Call – December 8th, 2022
Long Term Investing Podcast with Barry Schwartz
Forget Stock Predictions for Next Year. Focus on the Next Decade – New York Times