2022: Best Year Ever

There’s a scene in the 2nd season of HBO Max’s White Lotus where the English character, Jack, claims “We’re living in the best time in the history of the world. If you can’t be satisfied living now, here, you’re never gonna be satisfied.” Jack is responding to Portia’s complaint that “the world is a f***ed up place.” (None of this is a spoiler, by the way)

Now, they both have valid points. Portia is concerned about her career, finding happiness in a world dominated by social media and her general anxiety about being satisfied with her life. But, I would argue, Jack’s response injects perspective into the discussion. I don’t know about you, but I’ve grown quite accustomed to reliable heat and air conditioning, quality healthcare, a safe community protected by police and fire departments, to name a few. Not to mention access to information on virtually anything I would ever want on MY PHONE. Pretty decent time to be alive, indeed!

If you’re reading this, however, it’s not for my world perspective but for insight on the investing world. And 2022 was definitely not the best year ever. The S&P 500 stock index of large, U.S. companies declined over 18%, the NASDAQ index of tech companies lost 33% and bonds performed historically poorly.

A broader perspective shows a rosier picture, though, and reasons to be optimistic:

• The rise in interest rates means bonds are yielding more. A portfolio of high-quality bonds yielding a more historically normal 4-5% is certainly better for retirees taking income from their portfolios for living expenses. It’s also better for those of us still working as it helps balance out and diversify our portfolios;
• With higher bond yields, there is less incentive for investors to take unreasonable risks in the stock market. When interest rates were near zero, some investors chased returns wherever they could get them, including companies that had little to no earnings. Tesla’s market capitalization, for instance, was more than all the other car companies put together despite relatively small earnings. 2022 saw its stock price tumble 70% as investors veered away from risk and toward opportunities in bonds and stocks of companies with steady, long-term earnings;
• Stocks are now more appropriately valued relative to their earnings. For instance, the S&P 500 price per earnings at the beginning of 2022 was almost 21. Now, that number is closer to 16.5 – meaning an investor pays $16.50 for every $1 of earnings, a $4.50 discount from this time last year. Take it from Robert Shiller, Nobel prize winner in economics, “After a stock market decline, people may perceive more risk than before when, in fact, the decline may have taken some of the risk out of the market.”

It's natural to look at calendar quarters or years when evaluating returns, but what really matters is a longer-term view that, as in life, provides necessary perspective.

Steve Byars, CFP®