Market Commentary January 2023

And then 2022 happened!  A year investors will remember for a long time.  The year brought us arguably the worst calendar year for bonds, ever.  Much can be blamed on rising inflation and the Fed’s delayed response in pivoting away from expansionary monetary policy.  While investors enjoyed the easy money made in 2020 and 2021 all  should (but some do not) acknowledge investing in the stock and bond markets carries risks.  Congratulations if your portfolio was fully invested at year end.  This simple but at times hard to do practice greatly improves your chances of long-term investing success.

Much of the current inflation and higher interest rates have been blamed on excess government stimulus, a worldwide supply chain that has been calibrated to the point it must run perfectly or shortages appear.  In addition, a war has disrupted the oil and natural gas markets.  This energy disruption has proven at least for now that solar and windmills are not the sole answer to the world’s energy demands.

The fourth quarter of 2022 provided some relief for stock and bond investors.  The S&P 500 rallied 7.5% in the quarter bringing the full year return to -18.1%.  Unlike the last two years, growth stocks were a huge drag on performance in 2022 down -29.1% while value returned -7.5%.  Value stocks outperformance was consistent for large, mid, and small capitalization.  The foreign index was down -16% for the calendar year providing a slightly less worse return.

Digging deeper into 2022 return numbers for every S&P sector were negative for the year other than Utilities (+1.6%) and of course Energy (+65.7%).  The energy sector performed well given rising prices brought on by Russia’s invasion of Ukraine and the resulting boycotts of Russian companies and products.  Energy and to a lesser extent agricultural products were responsible in large part for the strong annual performance of commodities.  Portfolios with commodity exposure were somewhat buffered by the poor stock and bond markets.  U.S. companies with large operations in Russia were forced to stop production and sell off assets at fire sale prices which directly impacted their 2022 earnings.

Interest rates unlike stocks soared during the year.  The two-year Treasury started out at 0.73% and ended the year at 4.41%.  The ten-year maturity began at 1.50% and yielded as high as 4.30% in October before closing at a yield of 3.84%.  These are two examples of significant yield increases which helps explain the historically poor performance of bonds in 2022.   Expect additional rate increases by the Fed in 2023 and let’s cross our fingers for a soft landing to inflation.  Given how tough a soft landing is to engineer, you may have a better chance finding a  unicorn in your backyard.

A recent article in the Wall Street Journal reviewed the standard 60% stock / 40% bond portfolio after 2022’s performance.  Surprisingly the article’s author made the case this portfolio is in a better position now than it has been in more than a decade to earn superior risk adjusted returns.  Understandably not a lot of comfort for those invested last year but it does make sense now that short to intermediate maturity bonds offer decent yields.

It is our job at Sugar Maple Asset Management to work within the parameters of each client portfolio to look for opportunities to earn better returns than the benchmark.  In 2022 we did this by outperforming the bond benchmark with significantly shorter maturities and inflation protected bonds. Clients benefited from exposure to a commodities fund that was positive for the year.  Looking forward to 2023 foreign stocks are cheap.  Bonds should offer ballast to a portfolio and provide for less volatility.   According to T. Rowe Price last year’s performance of the 60%/40% portfolio had a probability of occurring once in every 130 years.  Here’s hoping investors stay fully invested and the markets surprise to the upside in 2023!