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2022: The Start of a Lost Decade
COVID was tough. But at least investing was easy.
With Fed underwriting debt and equity markets, every stock went into full on bull mode.
Like 2008, the thinking went as follows: stabalize first, deal with the consequences later.
For nearly a decade after the Great Recession, the consequences were non-existent in terms of inflation.
Let’s put this in perspective.
From January 2010 to December 2020, net inflation stood at 20.3%.
From January 2021 to November 2022, net inflation hit 13.8%.
In less than two years, inflation captured more than half its total increases from the prior decade.
Is it any wonder that the Fed is willing to chop off the stock market at all costs?
The 1970s were one of the worst decades for investors.
From 1970-1980, the S&P 500 returned 82.99% or 6.23% per year… but…
…adjusted for inflation, real returns were -2.2% overall, or -0.22% per year.
Sure, Americans are getting pay raises. Yet our real incomes continue to decline.
2022 was remarkably similar to the 1970s.
Consider the following:
The only real difference is unemployment, which ran close to 10% in the 1970s versus today’s sub 4%.
2022 frustrated investors.
Yet, there are key lessons to be learned and applied to the future.
Given the remarkable similarities to the 1970s, we need to separate fact from fiction to develop a clear picture of what’s ahead.
Inflation Is Real
People threw around the word “transitory” so much in 2021 you would have thought it was a popular baby name.
From politicians to Fed Chairman Jerome Powell, many believed once supply chains caught up, inflation would temper its rage.
Instead, it spread beyond used cars and housing to healthcare, energy, and every other corner of our pocketbooks.
A chart from the Federal Reserve shown below highlights the severity of the problem.
Measured as a percentage change on a basket of goods year over year, inflation hasn’t been this high since the 1970s, hence the comparisons.
And as the gray bars show, it always ended in a recession.
Prepare for Pain
The Federal Reserve hates to make mistakes twice.
In the 1970s, they failed to tighten monetary policy, letting inflation spiral.
It wasn’t until Chairman of the Federal Reserve Paul Volker took the reins, pushing interest rates past 15%, that inflation finally cracked.
Every time pundits pop on television to tell us the Fed will blink, we get a speech from one of the central bank board members with a response akin to “hold my beer.”
No wonder every economist from New York to Los Angeles expects the U.S. to head into a recession.
The Federal Reserve holds dual mandate of price stability and employment.
Since employment remains confusingly low, there is no reason to expect the Fed to take it easy.
Sure, headline names like Goldman and Oracle may be chopping headcount.
But help wanted signs in leisure and entertainment have yet to disappear.
That’s put incredible pressure on the sector.
We use the word “tech” loosely here to encompass startups from DoorDash to Amazon.
Any company built on cheap debt used to fund high growth got pummeled.
There’s no better example than Carvana (CVNA), a company built on the incredibly stupid premise of car vending machines.
Shares that once traded near $400 are down more than 98% as the company flirts with bankruptcy.
Low interest rates let these companies borrow beyond their means, paying pennies on every dollar they borrowed.
Now, as they go to roll their debt, management is suddenly faced with crippling interest expenses that they knew would come eventually.
Keep in mind, this is just from the hikes in interest rates.
Once we get to whatever terminal rate is chosen, it’s unlikely rates will decline.
That’s why we expect more companies to face solvency issues in the near future.
The Power of Profits
And yet, powerhouses like Apple (AAPL) held up remarkably well given the circumstances.
While advertising companies like Meta (META) and Google (GOOGL) saw advertising demand slip, folks still want their iPhones.
The only hitch for Apple has been its supply chains crimped by China.
Plus, shareholder friendly return strategies including buybacks and dividends attracted investors looking for yield in a muddy market.
The Politics of Business
We want to end our review with one rather disturbing trend that pushed into the forefront during 2022.
People have this ill-informed notion that for decades, businesses eschewed political activism in favor of neutrality.
It’s not just short-sighted but dead wrong.
As long as we’ve been alive, business and politics have held messy relationships at the best of times:
All of these seem reasonable now. But at the time, they were quite radical.
Here’s what’s different.
Not since the civil rights movement and the red scare before that have politicians actively legislated against corporate activism on a broad scale.
And it’s sweeping through every ideology.
We’ve watched politicians in one-sided legislatures in liberal and conservative ideologies wield their political power like a cudgel.
It’s modern-day McCarthyism that dehumanizes “others.”
And it’s created a cloud of uncertainty over business that hasn’t existed for nearly half a century.
When lobbyists push for business beneficial legislation, we know what to expect.
But when corporations push for societal change and politicians push back, it leads us down a path of uncertainty sure to make investing more challenging.
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