“It’s only when the tide goes out that you learn who’s been swimming naked.” – Warren Buffett, 1992 letter to shareholders of Berkshire Hathaway
In his typically colorful way, Mr. Buffett was referring to the insurance industry as it was recovering from Hurricane Andrew. Since then, the quote is often used any time the financial markets are experiencing significant volatility and 2022 is no exception.
In this case, the global response to the Pandemic created a flood of liquidity through multiple stimulus programs aimed at state/local governments, businesses of all sizes, and individuals. From the first quarter in 2020 through the end of 2021, the combination of ample liquidity and low-interest rates created an environment where risk assets of all types provided above-average returns.
2022 was the year the liquidity “tide” started to go back out. With less liquidity and interest rates moving aggressively higher, the bull market in stocks ended, the bull market in bonds (40 years old) ended, and every type of asset needed to be repriced to reflect the new environment. As we peer into 2023 and beyond, the new investment landscape is very different; it is time to reset and re-evaluate each part of your investment strategy.
2023 Private Wealth Themes
Theme 1: Risk vs. Return
The relationship never changes, but the economic scenario has. Long bull markets in stocks tend to lead to complacency. The team at Private Wealth will be reviewing Investment Policy Statements with clients to ensure the level of risk in portfolios is still aligned with goals and objectives. Volatility (up and down) presents opportunities to re-examine capital gains budgets, to improve tax efficiency, and to rebalance portfolios to enhance expected rates of return.
Theme 2: Interest Rates vs. Inflation
Interest rates are significantly higher than at the start of 2022; investment portfolios need to adapt to this new environment. After playing catch-up for most of 2022, the Federal Reserve appears likely to continue to increase short-term interest rates into 2023. As inflation moderates in 2023, investors have an opportunity to significantly increase the income generated by their investments through strategic investments in fixed-income securities.
Theme 3: Short-term needs vs. Long-term goals
This bear market will end; and, using the historical length of bear markets as a guide, that may occur in 2023. (The average bear market since 1950 has lasted 14 months and this one is 11 months old. Two thoughts on what to do:
- Have a plan to meet the liquidity needs for the next 18-24 months. Averages are just that, averages; every bear market and every economic recovery is unique.
- Asset classes that tend to perform well toward the end of bear markets and early in the recovery phase of the business cycle are illiquid assets like private capital and U.S. small-cap stocks. Growth assets will still play an important role in your portfolio through the lens of generating actual long-term rates of return above inflation.
For a perspective from our partners at Fiducient Advisors view their 2023 Outlook here.
At Private Wealth your goals are our goals. Our team looks forward to sitting down with you soon to review 2022 and set a course of action for 2023 that meets your goals.