Looking Back & Looking Ahead

First the core beliefs:

Every January all of us at TSA Wealth Management like to recap the previous year and restate some of our team’s core beliefs.

• We are long-term, goal-focused, plan-driven investors. We believe that lifetime investment success comes from acting continuously on our plan. Likewise, we believe substandard returns, and even lifetime investment failure, come from reacting to current events.

• The unforeseen and indeed 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, when it comes to your stock portfolios, we believe that the most reliable way to capture their full return is to ride out their frequent but historically always temporary declines.

• These will continue to be the bedrock convictions that inform our investment policy, as we pursue your most important financial goals together.

Current Observations

Chaos Continued in 2022

• The central drama of the year—and, it seems likely, of the coming year—was the Federal Reserve's belated but very aggressive efforts to bring inflation under control.

• After returning nearly 700% in the years between the trough of the Global Financial Crisis (March 9, 2009) and January 3, 2022, the U.S. equity market sold off sharply; at its most recent trough in October, the S&P 500 was down 27%. (Bond prices also swooned in response to sharply higher interest rates.)

• It seems to us 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 mainstream equity market managed to close out 2022 somewhat higher than it was at the end of 2019 (3,839versus 3,231, a gain of nearly 19%). Not great, but not at all bad for three years during which our entire economic, financial, political, and geopolitical world was turned upside down.

• If anything, this tends to validate our core investment strategy over these three years, which—simply stated—has been: stand fast, tune out the noise and continue to work your long-term plan. That continues to be our recommendation, and in the strongest possible terms.

Recession in 2023?

• 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, the way this plays out may determine the near-term trend of equity prices. Our position continues to be that this outcome is simply unknowable, and that one cannot make rational investment policy out of an unknowable.

• That said, we continue to believe strongly that 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, then so be it.

• Although this may be hard to remember every time the market gyrates (and financial journalism shrieks) over some meaningless monthly economic datum or other, we are not investing in the macroeconomy. Our equity portfolios largely 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. We like what we own.

Bonds Now Generate Income

• On January 1, 2021, the 5-year Treasury was paying 0.45%.  By January of 2022 it was paying 1.54% and today those same investments generate around 4%.  In other words, $1,000,000 invested in Treasuries went from having an expected yield of $4,500 / year in 2021 to $40,000 / year today. Retirees needing a secure income stream for a portion of the portfolio can once again consider bonds.       

• Shorter-term rates are higher than long-term rates.  In this inverted rate curve environment is tempting to load up on short-term bonds for the higher current cash flow and perceived safety.  However, there continues to be a high likelihood that interest rates will decline, and the shorter the portfolio, the higher the reinvestment risk. 

Finally, to all of our clients, we look forward to going over these with you in more detail during our reviews throughout the year.  In the meantime, as we always say—but can never say enough—thank you. It is a genuine privilege to serve you.