On behalf of the entire Ratio Wealth Group Team, I want to wish you and your loved ones an incredibly happy new year. While 2022 was an unusual year from a market perspective, we hope the areas of health and family good fortune were kind to you. Our wish is that you receive continued blessings through 2023.
As we reflect on the previous year and infer what the next twelve months will hold, many of the themes remain the same. Unfortunately, we do not hit the headline reset button every December 31st. The war in the Ukraine continues, inflation persists, recession fears are real, and the Federal Reserve seems to be the puppeteer for the economy. Certainly, there will be unforeseen additional issues to address going forward. Let us hope levity is the directional bias in 2023.
If there is a silver lining, many of the topics above are in their latter stages. Inflation peaked last summer and has been steadily declining, month over month. Recession, by defining measures (temporary economic decline as measured by two quarters of negative GDP growth) is plausible but potentially shallow based on a variety of factors, including an improving supply chain and a resilient consumer. Lastly, the Federal Reserve has acknowledged the lag affect to their unprecedented rate increases and anticipates a “slower” pace as we move forward.
This backdrop brings us to what is coming. Market pundits have a tradition of foreshadowing market returns based on a myriad of models and tarot card readings. Last January, 14 of the leading financial firms shared their forecast of what the S&P500 would return in the ensuing twelve months. On average, “The Street” expected a very boring 4% return. On December 31st, 2022, the S&P500 closed at 3839.50, a decline of ~19.5%, supporting the notion that there are only two types of forecasters… those who don’t know and those who know they don’t know.
Ratio Wealth group is in the latter group. We use a planning background to build a strategy that acknowledges that what happened in 2022 is possible at any given moment. We do not like down markets, but we expect them to happen. The market volatility that transpired last year is the price we pay for true long-term capital appreciation on assets that are designed to support your needs well into the future. It is a very healthy process for assets to “re-price” when conditions change as dramatically as they have. This year was simply exceptional in that both bonds and equites had negative returns which has only happened three times in the last 94 years.
History tells us that corrections are needed to re-establish a base for new fundamentals to assist in forward appreciation. Equities and bonds are no different than other assets. Look what is happening in your neighborhoods as home prices readjust to mortgage rates that have gone from a little over 3.0% a year ago to around 6.5% currently. The houses are structurally the same, what is different is what a buyer is willing to pay until the next upcycle begins. Keep in mind, that even with what transpired last year, the S&P500 is up over 40% since the worst of COVID. On an annualized basis, the index is up 9.5% over the last 5 years, up 12.6% over the last 10 years, up 8.8% over the last 15 years and up 9.8% over the last 20 years.
We continue to make tactical decisions around your portfolio allocations. Before the year began, we tilted portfolios to have a slightly more defensive posture. The thesis was driven on elevated valuations for certain sectors and industries, with technology being our biggest concern. We continue to believe in this approach. Now that the cost of capital is essentially greater than zero, valuation and the price we are willing to pay for assets matter. The momentum-market that was fueled by cheap money since the financial crisis is a thing of the past. As painful as last year was, the current environment is a more attractive platform for investors like us.
Additionally, we used the downward trends to tax-loss harvest in taxable accounts. If we are going to have these negative years, active management allows us to reduce future gains and potentially offset some of your ordinary income. As we enter 2023, you will see an increase within fixed-income allocations. At the next Fed announcement, small additions are called for with investment-grade fixed income rates now more attractive. Unfortunately, with an easy monetary policy over the last decade plus, investors had to go up the risk-curve to beat inflation. We are now in the early innings of bond allocations doing what they are intended for, which is to improve yield and reduce volatility. We are not at optimal levels, but the directional trend is positive.
I know 2022 created stress for you or people you care about. As your financial advisor, please lean on us for all your concerns and aspirations. We are here to help. Our foundation building process continues to center around financial stability with calculated growth to support savings strategies and efficient cash-flow generation when you have to fund the retirement years. We design plans to ensure that a balance exists between capital preservation on your balance sheet, safe strategies to support cash needs and longer-term growth for assets that benefit from time. Remember, time in the markets is your friend and timing the markets is a losing strategy. In 2023, stay healthy, stay focused on making your days productive and stay invested.