To the very end, Take-No-Prisoners was the past year’s battle cry from global markets. Arguably the most painful move in markets over the past year has been the sharp decline in government bond prices (and its reciprocal rise in yields). Investors around the world know that stocks can provide a bumpy ride but the unusually large sell-off in government bonds, alongside falling stock prices, left investors with no place to hide. For perspective, the UK government bond market was particularly hard hit, falling by -25% over the year. That pales the U.S. Bond Aggregate Index decline of -13.01% – however, that is its worst year on record. Both stocks and bonds declined over -12.5%, the first and worst ever. The iconic 60/40 portfolio, (60% stocks / 40% bonds), the historical gold standard portfolio mix for the largest diversified pools of public assets around the world ended 2022 down -17%, its worst since 2008 and fourth worst on record.
For model portfolios in public securities, there were no silver linings – they both (taxable and non-taxable) lost money. Any losses are painful and outperforming benchmarks when they are all in the red is no saving grace. Our taxable model portfolio, TQM, was down -14.38% vs -17.96% for its benchmark (see chart above). December was a dagger for TQM-IRA, our non-taxable model portfolio. It lost -17.52% on the year vs -16.97% for its benchmark. December cost the model 119 basis points in relative performance alone – the worst relative month of the year. On the fixed income front, our primary bond manager, CW Henderson, finished the year right on top of their benchmark -4.8 vs -4.8. However, CWH was harvesting tax losses all year even though tax losses don’t show up in performance numbers. They know after tax returns are what investors care most about.
The only shining light in client portfolios last year came from private investments. That makes Stuart Katz, our Chief Investment Officer and the primary person responsible for selecting the private investments in your portfolios, our consensus All-American MVP for 2022. The final year’s returns for most of our private investments will not be available until mid-February as is routine in that space. But there is at least one 60%+ return that I know of and several with 30%+ IRR’s. I don’t yet know of any losses. Thank you Sir Stuart.
All right, no more looking back. What’s ahead? At this moment, I have no evidence that would contradict yesterday’s (1/9/2023) all-trends analysis from Ned Davis. He believes the long-term bull market trend may take awhile before it reasserts itself. The intermediate-term trend message is mixed according to NDR data, leading him to believe the market will trade in the same range it has been in for the last six months (S&P 500 high of 4300, low of 3500 = approximately +10% / -10% from today’s close at 3920). He is hopeful in the short term.
I’ll leave the monthly note with the following. BCA research, the old Bank Credit Analyst, Canadian global research firm put out what I thought was an interesting strategy piece last night:
Equities: The conventional wisdom sees stocks falling in the first six months of 2023 in anticipation of a US recession and then recovering in the back half of the year once the first green shoots appear. We think the exact opposite will happen: Stocks will rise in the first half of 2023 as hopes of a soft landing intensify, and then dip in the second half. Favor non-US stocks in 2023, especially emerging markets. Small caps will outperform large caps.
Nothing about that contradicts Ned’s forecast … interesting.
Source; Addepar, BCA Research, Bloomberg, JPM Asset Management, Ned Davis Research
Be well,
Mike