Tudor January 2023 Commentary
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2022: What We Know Now

The long-term trendline of the market over the last two decades has been remarkably positive, but not without drama. This past year shows that periodically markets need to regroup and reset.

The year 2022 began at a high water mark. It was in mid-2021 that we had suggested that valuations had gone well above trendline, making it challenging to find undervalued securities by 2021 year-end. Speculation that year was rampant - from meme stocks to crypto to very familiar large growth names (the FAANG's). By year-end, we again communicated our thought that valuations were stretched.

As 2022 began, with markets at historically pricey levels, they were vulnerable to valuation adjustments. Markets did not anticipate a major and risky war (that also caused worldwide supply constraints), inflation from government stimulus checks, and did not expect the Federal Reserve to telegraph such aggressive interest hikes as they have over the last year. (On that note, we would suggest that the Federal Reserve came to the war on inflation very late and are doing their best to squeeze out from the economic system inflation psychology.) We will say it again: all asset classes decline under the weight of interest rates. The real estate market is now showing this clearly. Historically conservative and resilient bonds were down around 18% last year, which was the worst decline bonds have suffered in history for U.S. investors.(4)

Did You Catch That?
We see last year's market clearly in hindsight. Nobody rang a bell and there was no fanfare: if you missed it, markets bottomed near September quarter-end 2022. As of this writing, the S&P 500 is about 16% higher from 2022 lows.(1) For those that are prone to panic selling, this is how market bottoms are easily missed every market cycle.
History to Provide Perspective
Going back just a few short years, markets provided investors with an uninterrupted stream of exceptionally high, extreme returns for the few years leading up to 2022. The S&P 500 performance for the three years of 2019 to 2021 doubled investment dollars, and this outcome included a 35% 2020 intra-year COVID market decline.(1) Clearly an unsustainable trajectory.  

If we go back a little farther, the nineteen years beginning 2003 through 2021 saw only two declining years. These included a 2008 decline of 37% (surprisingly the only declining year in the Great Recession of 2007-2009) and a 6.2% decline in 2018 when tariff talk and federal reserve fears arose.(1) Two calendar year declines over nineteen years, and a doubling of asset values for the three years through 2021. 
Severe or Mild Recession?
Or None at All?
Even into the new year, there is a daily barrage of news about the probability of recession. This is no longer fresh news, and this prospect has already been priced into markets. Perhaps the country is convincing itself that recession is an unwavering outcome.

However, for all the commentary about the train slowing, new economic news shows that the economy grew 2.9% in the final quarter of 2022, and this followed 3.2% growth in the prior year's third quarter(5) No doubt higher interest rates will slow the economy, and real estate pricing and sales, for example, are reflecting the effects of higher rates.

However, it is difficult to create an argument for a severe recession when the economy is begging for employees even as 10,000 baby boomers retire every day.(6)

We will see if this train comes to a stop or continues chugging along.
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The percentage decline in real estate sales year over year through December 2022(7)(3)

"When people say they want to be a millionaire, what they actually might mean is that they want to spend a million. And that is literally the opposite of
being a millionaire"
Morgan Housel
Dow Industrial Index

March 23, 2020 - 18,214 (2020 low)

January 26, 2023 - 33,949(1)

86% Gain
Enjoy the week...
Grant S. Donaldson, MS, CPA
(1) yahoofinance.com, S&P500 historical data, Barrons, Morningstar.com, Vanguard benchmark returns
(2) Information available upon request
(4) https://www.cnbc.com/2023/01/07/2022-was-the-worst-ever-year-for-us-bonds-how-to-position-for-2023.html#:~:text=The%20longest%20U.S.%20government%20bonds,dating%20to%201754%2C%20McQuarrie%20said.
(5) https://www.cnn.com/2023/01/26/economy/us-gdp-fourth-quarter/index.html
(7) https://www.cnbc.com/2023/01/20/existing-home-sales-drop-in-december-to-slowest-pace-since-2010.html
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