To say the past year has been a disappointment for retail investors would be an understatement.
Many were drawn into the markets by the pandemic-era exuberance that fueled by low interest rates: Stocks surged, crypto boomed and markets popped. And then 2022 landed with a thud.
Russia’s war in Ukraine, persistent inflation, rising interest rates and fears of a recession shifted the landscape, with the S&P down nearly 20% and the Nasdaq slumping more than 30% as the year comes to a close. Bitcoin has been even worse, plunging more than 60%.
Will conditions improve next year? The outlook isn’t bright. Bank executives have been talking about job cuts and a recession in 2023. And economists are still divided on how high the Federal Reserve will go with its interest rate hikes, which are intended to tackle inflation but have also dampened the economic mood everywhere from Wall Street to Main Street.
With this in mind, Bloomberg News put four questions to financial advisers from across the country. Two questions focus on lessons learned from the past year, and two on what’s ahead. The takeaways are below, edited for length and clarity.
Think Long-Term
Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky
What did you get wrong ? I was not quite on “team transitory,” but the breadth and depth of this year’s inflation problem surprised me. While we are seeing pandemic-related goods inflation return to normal, I underestimated the extent to which our labor shortage would lead to stickier wage growth and services inflation. The labor market is still very disoriented. Russia’s invasion of Ukraine obviously pressured commodity prices as well, but domestic inflation is a much broader issue.
What did you get right? That the Fed would have a single-track focus on inflation. With their employment mandate basically fulfilled by the end of 2021 and the decision to drop the “transitory” language from their communications, we expected the Fed would functionally have a single mandate in 2022: price stability. Though the pace has been more aggressive than anticipated, we weren’t overly surprised by the commitment to beating inflation. We also expected that the consumer would remain a bright spot in the economy, and that has proven true. Despite historic inflation and rising interest rates, retail sales and personal spending have been robust.
How are you telling clients to position themselves for 2023? We’re telling clients to think long-term and stick to their plan. We expect more volatility in the near-term, including the possibility of retesting the October lows early in the year, but we think the setup for long-term investors is starting to look attractive. Valuations have mostly reset, and fixed-income yields are still hovering around decade highs. More tactically, we think near-term caution and defensive positioning makes sense. We’d favor adding to quality in both fixed income and equities and using rallies to reduce exposure to more speculative assets as we head into an economic slowdown or recession.
What is the single best opportunity you see in the year ahead? High-quality equities, with a focus on strong free cash flow and margin resilience. Margin defense should be a theme that is rewarded in the coming year given the downward pressure on profit margins that we are already seeing and the likelihood it continues into 2023. Most high-quality indexes are tech and growth heavy, but we’d skew away from those sectors in favor of shorter-duration equities and cash-flow generators.