By Craig McAvinue – January 4th 2023
“Quality is remembered long after price is forgotten.“
Happy New Year. A look back at 2022’s market performances makes for pretty grim reading:
Data table is from Google Finance
It was a fairly quiet month on the currencies front. The USD gave back some of its gains but still managed a very strong year thanks to interest rate increases and the perception of being a safe haven.
Data table is from Google Finance
On the one hand: this was the fourth worst year for the S&P in the last 50 years. It was the third time in the last decade it finished down for the year, and both previous down years were considerably less than 19.4%. The Nasdaq was down a whopping 33% in 2022.
On the other hand: in each of the years following a down year, the S&P has bounced back strongly: 32% (1975), 26% (2003) and 23% (2009).
So what happens next? Do we have the best buying opportunities in 15 years or is there more pain coming along in 2023? If history is to repeat itself then now is most definitely the time to buy.
Management of the inflation and Federal Reserve interest rates is still the key to how quickly the recovery begins. I mentioned in previous Market Updates that the inflation data has been looking positive: five months in a row of slowing and the expectation that December will see a sixth straight negative month, possibly dipping below 7%.
This would also lead us to believe that confidence in the markets will return, with great growth opportunities in buying good quality assets at these depressed prices.
A lot of predictions I am reading about the coming year suggest that the first six months will see ongoing struggles with volatility and more losses with recessions looming. The situation in the Ukraine and more Covid issues in China loom as causes of continued uncertainty, which is what the markets hate the most. The second six months are generally seen in a more positive light.
Regular readers will know that I see predictions as futile. No one has a crystal ball that can predict what will happen in the next day, let alone six or 12 months. Hence for every bullish analyst you have a bearish contemporary. Waiting six months to try timing a market is an example of poor financial management.
So buying quality companies in these volatile and unknown times is one way to ensure you will get a good return. To quote Warren Buffet, “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Examples of quality companies can be found by looking for dividend aristocrats. These are businesses that have increased their dividend every year for over 25 years, regardless of the market environment, recessions, financial crisis, etc. Johnson & Johnson, Coca-Cola, Procter & Gamble are all examples of the royalty of dividend aristocrats, having increased their payouts to shareholders for at least 60 years.
Companies like these are not immune from suffering losses during a bloodbath like what happened in the last 12 months. An exchange traded fund (ETF) that owns only the aristocrats would have been down 6% in 2022. Not great, but a lot better than most EFTs fared.
Years like 2022, 2008, and 2002 teach us that we can never be complacent with our investments. Two to three years of growth can be wiped out in a single bad year and can take a long time to recover. So managing this process to ensure you keep your gains is very important. Knowing what your time horizons are, setting growth targets and locking in profits and reinvesting in non-correlated opportunities are all strategies that work.
Though this market undoubtedly provides some good buying opportunities for those with a longer term view, just make sure those opportunities are high quality rather than just cheap.
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