Good riddance to 2022. It was a rotten year. I am not happy with the results, but we learned from 2008 and 2000 that these times do not last. I rest on a track record built over 36 years of managing client investments. Our goal has been, and continues to be, to create portfolios of stocks which will increase by multiple times of their current values. I believe that 2023 may be a good year for our portfolios, even though I suspect it will be an uneven year for the stock market. 2023 may be a good year for certain stocks even as the Federal Reserve continues to raise interest rates. The question of whether there will be a hard or soft landing may be a moot point. The highly anticipated recession of 2022-2023 may never happen.
The Taylor Principle states that to cure inflation, the Federal Reserve needs to raise rates above the rate of inflation. The Fed is monitoring the PCE (Personal Consumption Expenditures) as the key to inflation, not the Consumer Price Index (CPI). The PCE index came in showing inflation has essentially been five percent (5%) above the previous year for every month of 2022 in spite of the interest rate increases. The reason? About half of the PCE is determined by wage and wage-sensitive industries. In the United States, there are four million more job openings than there are workers to fill those jobs, and the number will increase, not decrease. Most months, there are 200,000 to 300,000 or more new jobs being created, but fewer than 100,000 new employees entering the work force.
In past times, when the Fed was raising interest rates and slowing the economy, consumer expenditures fell off. The logic was pretty simple: People who are worried about the security of their jobs usually don’t spend lots of money eating at restaurants, buying new cars, frequenting shopping malls, or upgrading wardrobes. But as we have said many times, what has never happened before happens all the time. In 2022, 47 million Americans changed jobs. A Microsoft study earlier in 2022 found 40% of workers were considering looking for a new job. The rate of turnover last year was the highest ever recorded. People are not concerned about losing their jobs, they are choosing to move for higher wages, better working conditions, better benefits, and etc.
As long as people are getting higher wages and better jobs, they are probably not going to cut back their spending. Inflation will continue at probably around the five percent rate, and I suspect the Fed will raise rates to six percent (6%) or so and continue to monitor the situation.
There will be some areas of the economy that are going to suffer. The number of mortgage applications dropped to its lowest level since 1996. But many companies will probably see their revenues and profits continue to rise. The recovery will very probably be uneven.
What that means is that on October 12, 2022, we probably saw the bottom of the market as measured by the S&P 500 Total Return Index. The market is probably on its way to recovery. Edward Renshaw of the University of New York at Albany published a study showing that if, 90 days following the bottom, the market had recovered approximately 33%, the bottom had been reached. This would mean, finally, that the market was on the way to full recovery. Renshaw studied all the times from 1872 until 1990 that the market had sold off 5% or more. There were 42 times when that had happened in those 118 years. 29 of those 42 times a recession was already in process, while 13 of them occurred during good economic times. In each of those 42 times the market recovered around 33% 90 days after the bottom had been reached. That study was completed in 1990, but that held true in the 1994 sell off, the 2000 dot-com crash, and the Great Recession of 2008. So far, it has been correct 100% of the time.
The Renshaw study has been right 45 or 45 times, and we guess it is going to be right the 46th time as well. The S&P 500 TR reached a peak of 4,766 in late 2021. On October 12, 2022, it stood at 3,520 – a loss of 1,246 points. As of market close on Friday January 6, 2023, the index stood at 3,894, a recovery of 374 points, just 39 points away from the 33%. Will the S&P gain the remaining 39 points or so this week?
We believe that things that have never happened before, happen all the time. Could this be the one time the Renshaw study falters and the market tumbles to new lows? It is possible, but the study has been right 45 of 45 times. My guess is that it will be again.
Our goal has been and continues to be to find those particular focus stocks that can deliver multiple times their value over the longer-term.