Good riddance 2022. 

An extremely difficult year for investors across almost every investable asset class. Not surprising given the Federal Reserve’s sudden and unprecedented gear shift from a stimulus to a tightening stance.   

Despite a moderate rally in the fourth quarter, both stocks and bonds closed out 2022 with significant losses, marking only the fifth time in 95 years that both the S&P 500^® and Treasury bonds were down in the same year.  Moreover, as both stocks and bonds fell, the much-heralded portfolio of 60% equities and 40% bonds dropped 24%, the worst return for this type of portfolio since 1931, and investment-grade corporate bonds lost 15%. 

Historically this 60% stock and 40% bond portfolio has assisted investors by providing a balance during stock market declines. However, with the Federal Reserve hiking rates from zero to 4.25% in 2022, the well-regarded 60/40 also suffered. Years in which stocks and bonds both declined are rare.  Rising interest rates created losses in fixed income that have matched losses in equities.

Market volatility, as measured by the VIX Index, held above the mid-20s for just about the entire year, even moving above 30 throughout the year, significantly higher than the long-term average of 17.3 over the last decade. Again, Fed tightening policy around inflation concerns was the main driver with intermittent jolts from geopolitical events, hurricanes, and energy policy concerns. 

Having raised interest rates dramatically and implementing Quantitative Tightening to shrink the government’s balance sheet, the Fed is aggressively working to remove the stimulus provided during the pandemic in an effort to ensure price stability, maximize employment and reduce inflation to target.

Market participants enter 2023 with concerns over lingering inflation and the associated Fed policy, downward earnings revisions, and a higher-than-normal prospect for a recessionary period ahead.

We believe the first half of the year will continue to be volatile, and the economy is likely to experience recessionary conditions, but we do not feel that a repeat of the ’08-’09 experience is likely. The excesses which led to the Great Financial Crisis do not appear to be present in this current cycle, but we acknowledge the dramatic increase in the cost of capital via interest rates is of concern. 

We believe it is important to recognize that successful investing is a continuous process that requires patience through normal economic and market cycles. Additionally, history strongly shows that market performance front runs changes in economic conditions, giving pause to timing strategies or sitting on cash for extended periods.

 As investment professionals working on your behalf, our mission remains to preserve and grow your capital, over time, by emphasizing high-quality investments seeking to maximize opportunity in the far more prevalent up markets, and minimize losses in the less frequent down periods. We acknowledge the disappointment experienced during 2022, but we pledge to position your assets to achieve your long-term goals. Our management team is continually evaluating portfolio companies for those with the greatest prospects for stability and return.

Best wishes in the New Year.

Sincerely,

Peter J. Connors, CFA

President

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