By Brian Nelson, CFA
2022 was an interesting year.
The three years ending 2021 were awesome. The markets were up huge over that time period, to the point where having some sort of a market pullback during 2022 could have almost been expected. I thought so, but I was quite bullish through the course of the year, in any case. It may seem odd to have been bullish, and be okay with the markets possibly going down during the year, but different time horizons have a lot to do with it.
After all, during 2022, I was pretty happy with the markets still up huge from the peak in February 2020–those levels that were reached prior to the COVID-19 crash. As of today, for example, the SPDR S&P 500 (SPY) is trading at a healthy ~$393 per share, up from ~$339 per share at the peak in February 2020, just a few years ago. That still represents a 16% price advance in one of the most-followed broad market indices, and that percentage excludes dividends received.
Though unfortunately a stock market advance never happened during 2022, I still don’t understand why many investors could be disappointed. Were they skeptical at the COVID-19 bottom, and then didn’t buy back in until sometime in late 2021 right before the fall? Now, some investors are even talking about a new 60/40 portfolio, where 60% are bonds, but from my perspective, I’ve never been more excited about the prospects of a 100% equity portfolio. I guess I’m in good company, too. Warren Buffett doesn’t like bonds either.
I went bearish on the markets in February 2020–that weekend right before the crash began–and then proceeded to grow bullish in March/April 2020–right about near the bottom–and then was bullish all the way through August 2022, when the SPY bumped right up against its 200-day moving average before it took another leg down. I missed the peak call in late 2021 and the first test of the 200-day moving average early in 2022, but I didn’t miss the August top, the second test of the 200-day moving average in the year.
On January 18, 2023, even as the Invesco S&P 500 Equal Weight (RSP) is breaking out, the SPY has bumped right off its technical downtrend again, and the markets are now headed lower…yet again. It has become a technically-driven market, as we remain locked in the downtrend that started at the end of 2021. But hasn’t the market already endured all market challenges? In the grand scheme of things, the markets are just back to February 2021 levels. That’s nothing to fret, in my view. However, based on investor sentiment out there, you’d think that markets have revisited the March 2020 lows, or something worse.
How is the negative sentiment even possible when the markets are up handily from their pre- COVID-19 highs? I’d love to hear your thoughts about why investor sentiment is so negative these days. Granted, cryptocurrency prices have collapsed, ultra-high-yielding stocks have been pummeled (perhaps never to return to their glory days), disruptive innovation stocks have been obliterated, and the 60/40 stock/bond portfolio experienced its worst year in 2022 in decades, but am I to believe that investors haven’t been heavily exposed to the SPY one way or another? What gives?
Haven’t the markets already endured all market challenges? I remember staying up late watching Bloomberg TV during the Great Financial Crisis in 2007-2009 as AIG (AIG) faltered, Merrill was sold, and Lehman went belly-up. Almost everyone thought it was the end of the global financial system as we know it. Without a bailout, some were even saying that there’d be no milk at the store. But we persevered. We came back. The Fed and Treasury bailed everyone out, and the markets then went roaring higher in the decade that followed.
After having the worst financial crisis in 2007-2009 since the Great Depression in the 1930s, then came the coronavirus, the worst health crisis since the 1918 flu pandemic. COVID-19 shut down most of the world’s economy, and then yet again, the Fed and Treasury bailed everyone out. They bailed out the airlines, the restaurants, and indexing strategies tied to these weakened businesses that should have gone to zero. Stimulus checks were sent to consumers, the Paycheck Protection Program sent tons of money to businesses, and savings rates soared. Here we are today. The S&P 500 is still up nicely since those pre- COVID-19 highs.
Now, inflation is rearing its ugly head. It’s all we hear about these days — everyone has become a macro analyst, too. The consumer price index [CPI] may have peaked in June 2022, and the latest December reading showed that price increases are easing on a year-over-year basis. Food-at-home costs are still up considerably since a couple years ago, but have we not already seen this? The early 1980s saw huge levels of inflation, and yet all we hear about the stock market is just how much higher it is from those levels. Is everyone trading month to month and missing the big picture that stock prices have already recovered from just about everything to get where they are today?
Next, we’ll start to hear about the federal debt levels, and how rising interest rates may start to weigh on the federal budget, crowding out other fiscal spending. But the reality is that market commentators have been talking about the federal debt levels for a very, very long time. Everybody knows about the U.S. government debt — it’s even a part of grammar school curriculums. Barring any political crisis, the U.S. can pay its debts as it’s one of the wealthiest countries in the world. Sure, printing money may cause a bit more inflation here and there, but again haven’t the markets endured everything already?
I don’t know about you, but I’m bullish on stocks for the long run. Had the Fed and Treasury let the financial system fail during the Great Financial in 2007-2009, I might be concerned today. Had the Fed and Treasury let hundreds if not thousands of the largest businesses fail as a result of COVID-19, I might be concerned today. If the U.S. wasn’t the strongest and wealthiest country in the world that can handle (and has historically handled) everything thrown at it, I might be concerned today. But I’m not concerned. I think the markets have already been through it all. We can’t know what 2023 has in store for the markets, but I’m bullish for the long run.
In light of everything that has happened the past century and beyond, how can anyone not be bullish on stocks?
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