By: Sheila Morgan
As we head into the last two months of the year, this time serves as a point of reflection on the year and the resolutions we had hoped to achieve and lament on the ones we didn’t. However, given the uncertainty of the markets this year, you, like I, may feel some ambivalence about making New Year’s resolutions, you may even want to turn back the hands of time if you could. This year, we have weathered some never-before-seen global uncertainty in the markets. However, it’s during these times that we begin to realize that we must continue to move forward by setting newer and higher aspirations for the year to come.
Inflation is like a genie in a bottle, once it’s out, it’s really tough to put it back in. Fed Chair Jerome Powell has acknowledged that this will cause some pain to the economy. But knowing how much pain to inflict to rein in inflation and knowing when to stop before the cure becomes worse than the ailment is another story. Restoring its inflation-fighting credibility should be the key to the Fed’s strategy as we head into 2023. If we do enter a recession, I do not believe that it will be long-lasting, consumers and businesses have stronger balance sheets, and the financial industry is not as highly leveraged with questionable credits that caused part of the Great Financial Crisis of 2008.
If I could turn back the hands of time for us, it would be nice to experience last year’s stock market rally, which was driven by the vaccine rollout, fiscal stimulus, accommodative monetary policy, strong economic recovery, huge gains in corporate profits, and a low-interest rate environment. The S&P 500 increased by 28.7% in 2021. The market increased in all four quarters of the year; Q1: 6.2%, Q2: 8.6%, Q3: 0.6%, and Q4: 11.0%. The S&P also closed out the year with a bang with a 4.5% gain in December as the Santa Claus rally was alive and well. The market reached a new all-time high on December 29th, when the S&P 500 closed at 4,793. The economic conditions of last year are vastly different from those of today.
Similar to the lessons that we learn in our lives, there is a silver lining to be learned amid the economic turbulence of this year. While bear markets are unpleasant, they do serve a purpose. They help work off the excesses that have built up since the previous recession, such as easy monetary policy, near-zero interest rates, excess liquidity, cheap money, and excess speculation (e.g. meme stocks, stay-at-home stocks, electrical vehicle related stocks, SPACs, and cryptocurrency). This year has reinforced the importance that in the long run, stock valuations and fundamentals matter. While this year has been painful for all investors, the S&P 500 Index is now trading at a forward P/E ratio that is below the 25-year average. On a historical basis, this explains that valuations are much more reasonable today.
Whether the worst is behind us is unknown, but on a valuation basis, the markets appear much more attractive today than at the beginning of the year. Our mantra continues to be that as long-term investors, we will continue to remain steadfast and stay the course to meet both our personal and financial goals. Maintaining the proper portfolio allocation is the long-term driver of our success.
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