In 2022, the Dow, the S&P 500, and the Nasdaq 100 experienced peak-to-trough declines of 21%, 25%, and 35%, respectively. A week before Christmas 2023, they were in a higher ground on a total return basis.
Why stocks did this is irrelevant to the wonderful lessons to be drawn from this experience. There are almost as many theories and explanations of why as there are market commentators, of whom I’m happily not one.
What should matter most to us long-term, goal-focused, plan-driven equity investors is not why this happened but that it happened. Specifically, that there could be a pervasive and very significant bear market over most of one year, and that those declines could be entirely erased in the following year.
I will break my year-end letter into two parts: first the timeless and enduring principles reinforced by these two years, and then a consideration of current conditions.
GENERAL PRINCIPLES
- The economy cannot be consistently forecast, nor the market be consistently timed. Thus, we believe that the highest-probability method of capturing equities’ long-term return is simply to remain invested all the time.
- We are long-term owners of businesses, as opposed to speculators on the near-term trend of stock prices.
- Declines in the mainstream equity market, through frequent and sometimes quite significant, have always been surmounted, as the most successful worldwide companies ceaselessly innovate.
- Long-term investment success most reliable depends on making a plan and acting continuously on that plan.
- An investment policy based on anticipating (or reacting to) current economic, financial, or political events/trends most often fails in the long run.
- I remain convinced that the long-term disruptions from the COVID pandemic are still working themselves out in the economy, the markets, and society itself, in ways that can’t be predicted, much less rendered into coherent investment policy.
- The central financial event in response to COVID was an explosion in the money supply by the Federal Reserve and the ECB. It predictably ignited a firestorm of inflation.
- Despite this, economic activity in Europe and the US has remained relatively robust, and employment activity has, at least so far, been largely unaffected.
- Inflation has come down significantly, though not yet close to the Fed’s and ECB’s target of 2%. But prices for most goods and services remain elevated, straining middle-class budgets.
- Capital markets have recovered significantly, as speculation now centers on when and how much the Federal Reserve and ECB may lower interest rates in 2024, and whether a recession may yet begin. These outcomes are unknowable – probably even to the ECB and Federal Reserve, and don’t lend themselves to forming a rational long-term investment policy.
My overall recommendations to you are essentially what they were two years ago at this time, and what they’ve always been. Let’s revisit your most important long-term financial goals soon. If we find that those goals haven’t changed, I’ll recommend staying with our current plan. And if our plan isn’t changing, there’ll most probably be no compelling reason to materially alter your portfolio.
As always, I welcome your questions and comments, and I look forward to talking with you soon. Thank you for the opportunity to serve you and your family.
Best regards,
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