Goodbye and good riddance to 2022. Last year was certainly a sea change in markets as central banks globally decided inflation was no longer “transitory” and the punch bowl was taken away via the fastest rate hiking cycle in generations to try and slow down inflation.
How terrible of a year was it? Below are some charts and tables which illustrate the pain was as widespread as it was intense with almost nowhere to hide.
The TSX Index was the “winner” last year of global equity markets with a -5.8% return. As we’ve said before, there are only 3 ways to beat the market: earn more in good times, lose less in bad or some combination of these. While “losing less” might feel like a hollow victory, in vintages like 2022 you take what you can get.
Diving a bit deeper though, the vast majority of this TSX performance is attributable to the energy sector. While not media darlings (more like pariahs) in 2021 energy names picked up right where tech left off (they also generate significant and real cash flows, unlike meme stocks).
These Energy names were large beneficiaries from the “re-opening trade” of 2021, regaining the ground lost in the pain of 2020 (and then some). The Russian invasion of Ukraine in February 2022 furthered this rise as it led to a rapid decrease in supply (due to the war or sanctions) which caused a spike in commodity prices. This in turn led to a prompt appreciation of companies refining and selling these commodities.
Finally, the below charts show that the traditional inverse relationship between stocks and bonds broke down in historical fashion last year.
The last time both US stocks and bonds ended the year with a negative sign in front of returns was the same year as the Apollo 11 moon landing (trivia points to anyone who can name all 3 crew members).
What does this mean going forward?
In my opinion, the most important lesson from 2022 (or any tough period in markets) is the importance of sticking to your process no matter what prevailing market conditions are. Investing in a bull market and watching your account value rise every day is easy! The real challenge comes from continuing to stick to that same process during the tough times (which ironically is when the best future gains are to be had).
You also never know when things will turn. 2023 got off to a hot start and an updated version of the above table paints a very different picture.
Historically, returns on the way out of Bear Markets have been very strong and can be quite rapid. Markets are forward-looking meaning that they see-through troubled waters to what's coming ahead. Pain today has historically meant gain tomorrow.
As always, if you have any concerns or would like to chat, please reach out to someone on the team.
If you enjoyed this, be sure to check out Adam Watson’s 2022: A Year in Review video.