2022 Mercifully Ends - 4th Quarter - 2022

Since the Global Financial Crisis of ‘07/’08, financial markets have benefited from ultra-low interest rates and a supportive Federal Reserve. The backstopping of banks and unprecedented government support provided financial tailwinds for virtually all types of risk assets. As investors, you couldn’t ask for a better ally. In 2022 the tables turned, and now we’ve all learned you also couldn’t ask for a worse enemy.

The Pandemic in 2020 brought swift and unforeseen consequences to the global economy. It’s clear now that central banks and, to a lesser extent, governments around the world did not handle the fallout well. The disruptions to supply chains were underestimated, as was the stickiness of the inflation problem. The Fed ultimately changed its tune and ceased using the word ‘transitory’ to describe inflation. It began raising interest rates at the fastest pace ever (see red line in below graph). The Fed was behind the curve and started playing catch-up.

Data Source: Bloomberg LP

Stocks and other risk assets have fallen dramatically this year as a result (down about 20% as measured by the All-Country World Index). Bonds also had a terrible year (down 15% as measured by the U.S. Aggregate Bond Index). It was high-growth stocks with share prices based on future profits that experienced the worst returns (the Nasdaq Index, for example, was down about 34% for the year). Higher inflation and higher interest rates mean future dollars assumed in stock price modeling are less valuable today.

Valuations for risk assets have declined materially, and investors have shifted their focus to fundamentals (i.e., profits now), rather than the allure of greater returns in the future. There’s no question that speculation got out of hand in 2020/2021, particularly with so-called ‘meme stocks’ and cryptocurrencies, as liquidity flooded the market. The bubble in these segments of the market has burst.

One year ago, we expressed concern that volatility would likely increase due to the change in Fed policy. Like most, we missed the magnitude of the adjustment to markets. However, a year later (we are not forecasting a bottom), we feel that the better part 2023 will be viewed as a period of transition to stability, providing a far better environment for investors.

Looking forward, we remain convinced that many of the innovative companies that solve the problems we face are the ones that will succeed. These include the challenges caused by climate change, food and housing insecurity, and finite healthcare resources to name a few. A higher standard of living for a greater portion of the world’s population can only be achieved by efficiencies brought about by research and innovation. It is imperative that progress marches on to support growing needs. Indeed, the UN projected the global population just surpassed 8 billion in November.

Source: United Nations 2022 Annual Report

Innovation is not linear, and neither are investment returns. Investing is, however, the only way to compound wealth over time and retain purchasing power in the face of long-term inflation. Our task at EPIQ is to understand your current and future needs, advise you to the best of our ability, and execute on that personal and customized plan. This execution is done in part by uncovering appropriate investment opportunities. It is our honor and pleasure to serve you in this position of trust. We do not take it lightly.

Thank you,

EPIQ Partners