Last year, the ValueAligned Model Portfolio was down -10.7%, including fees and costs. The S&P 500 Index, widely used as a proxy for the market, was down -18.1%, including dividends. (See performance disclosures here).
Unrelieved chaos continued in 2022.
The central drama of the year—and, it seems likely, of 2023—was the Federal Reserve's belated but very aggressive efforts to bring inflation under control.
After rising seven times in the nearly 13 years between the trough of the Global Financial Crisis (March 9, 2009) and January 3, 2022, the U.S. stock market sold off sharply; at its most recent trough in October, the S&P 500 was down -27%. (Bond prices also cratered in response to sharply higher interest rates.)
It seems more than a little ironic that, after the serial nightmares through which it's suffered since the onset of the pandemic early in 2020, the stock market managed to close out 2022 somewhat higher than it was at the end of 2019 (3,839 versus 3,231, a gain of +18.8%). Not great, but not bad for three years during which our entire economic, financial, political, and geopolitical world blew up.
If anything, this tends to validate our core investment strategy over these three years, which has simply been: stand fast, tune out the noise, and continue to work your long-term plan. That continues to be my recommendation and in the strongest possible terms.
The burning question of the hour seems to be whether and to what extent the Fed, in its inflation-fighting zeal, might tip the economy into recession at some point—if it hasn't already done so. Over the coming year, how this plays out may determine the near-term trend of stock prices. I believe this outcome is simply unknowable and that we cannot make a rational investment policy out of an unknowable.
Whatever it takes to put out the inflationary fire will be well worth it. Inflation is a cancer that affects everyone in our society; if recession proves to be the painful chemotherapy required to destroy that cancer, so be it.
Although this may be hard to remember every time the market gyrates (and financial journalism inflames passions) over some meaningless monthly economic datum or other, you and I are not investing in the macroeconomy. Our portfolios primarily consist of the ownership of enduringly successful companies—businesses that are even now refining their strategies opportunistically to meet the needs and wants of an eight-billion-person world. I like what we own.
Our Principles
You and I are long-term, goal-focused, plan-driven stock investors. We believe that lifetime investment success comes from acting continuously on a plan. Likewise, we believe substandard returns and even lifetime investment failure come from reacting to current events.
The unforeseen and unforeseeable economic, market, political and geopolitical chaos of the three years since the onset of the pandemic demonstrates conclusively that the economy can never be consistently forecast, nor the market consistently timed.
Therefore, the most reliable way to capture the total return of stocks is to ride out their frequent but historically always temporary declines.
These bedrock convictions inform our investment policy as we pursue your most important financial goals together.
As I always say—but can never say enough—thank you for being my clients. It is a genuine privilege to serve you.
Yours truly,
David