Lessons Learned in 2022

While not superstitious, even-numbered years have been much less friendly to investors than their odd-numbered siblings lately. We all know what happened in 2020, even though the year ended positively. Before that, 2018 featured a 20% drawdown, right before Christmas, no less. From an economic standpoint, it appears that some degree of a recession could be coming in 2023. Some make the case that we may already be in one. As I have written about before, predicting recessions is hard enough; predicting how the market will behave in response to them is even harder. I don’t write this to scare people – recessions are part of the normal ebb and flow of the economy.  With that, let’s look at some factors that got us to where we are now.

Mid-term election years really do matter.

At the beginning of this year, I wrote how midterm election years were typically more volatile than any other year in the presidential cycle. That turned out to be accurate this year. Despite the increased volatility, don’t lose sight of the long-term here.

Don’t fight the Fed.

The Federal Reserve controls the money spigot for our economy. When they want to give the economy a boost, they open the spigot. This year, they were committed to stopping the flow of easy money that put us in our inflation predicament. Tightening the screws like this affected the economy as well as financial markets, and we all felt the pain.

Inflation is hard to tame once it gets going.

For an entire decade, the Fed scratched its head, wondering how it could get the economy to hit its 2% inflation target. Why do they want any inflation at all? That is deserving of a separate post. Thanks to the policies enacted during the COVID lockdowns, the inflation genie came roaring out of the bottle. Now that it is out, they are trying desperately to put it back in with minimal success thus far.

Knowing economic data in advance would not guarantee investment success.

I touched on this in my last post, but it bears repeating. If you were supplied with the economic data from this year on January 1st, 2022, you would have had a difficult time capitalizing on that knowledge with a sound investment strategy. All the “inflation-sensitive” investments failed to do much in a year of generational inflation. 

The war in Ukraine compounded all the problems.

There is a very human element to war that I will not discount here. On top of all the challenges listed above, Russia invaded Ukraine at the beginning of the year which sent waves through the financial world. The lesson learned here is that unexpected external variables can throw even the soundest financial model off course. 

Conclusion

I think it is safe to say that this year is not one most people will look back on with affection. We know that, historically, roughly three out of every four years is positive in the stock market. 2019-2021 saw positive annual returns, which simplistically meant we were due this year. Of course, hindsight is 20/20, and using simple averages like that is no way to invest your money. My point is that occasionally, we need these resets to flush the system of excesses. It doesn’t make them any more fun to live through, but hopefully, we learned some valuable lessons. 

Author: David Rath, CMT, CFA

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