There may be no better summation of the year in the markets of 2022 than the January 17th headline in the Wall Street Journal: “Party City Files For Bankruptcy.” In and of itself, the bankruptcy of the small retailer selling party poppers, party hats, streamers and the like has virtually no impact on the markets. However, “party city” may be the perfect description of the financial conditions leading up to 2022. Trillions of dollars of liquidity were pumped into the US financial markets through fiscal and monetary policy, interest rates and subsequent borrowing costs were close to zero, and asset prices from crypto to common stock went straight up. The year 2022 marked the end of “party city” with virtually every financial asset posting a loss for the calendar year.
|Time Period||US Stocks||International Developed Stocks||Emerging Market Stocks||Global Real Estate||US Bond Market||Global Bond Market|
Between March 2020 and March 2022 (the “party city” period), the Federal Reserve added $4.8 Trillion to their balance sheet and federal government debt jumped from $21 Trillion to over $30 Trillion. The $9.0 Trillion in government deficit spending and $4.8 Trillion in federal balance sheet expansion both contributed to an abundance of liquidity delivered through low interest rates, federal stimulus checks, programs like PPP (loans for businesses) and ERC (tax credits for businesses), and more. This totals $13 Trillion in combined government stimulus in 2 years… “party city” indeed! This flood of liquidity was intended to combat the economic devastation of the government’s response to COVID, but instead resulted in inflation rising from a modest 1.3% in January 2021 to a peak of 9.1% in June 2022. To combat the inflation (that they created), the Fed began shrinking their balance sheet and increasing interest rates. In January 2022, the Federal Funds Target rate was 0.25%, and by December 2022 the Fed had raised to a target rate of 4.5%. Raising rates 4.25% in a single calendar year was a faster increase in rates than at any time in the last 100 years. So, if Party City (both the concept and the company) cannot make it in this economy, what hope is there for the rest of us…? Glad you asked.
Taking a long-term view, consumer net worth has more than doubled over the past 15 years to a current $142 Trillion. Fifteen years is my favorite “long-term view” anchor because it includes the Global Financial Crisis of 2007-2009. Taking an even longer-term view, any time equity markets have dropped by -20% the subsequent periods have produced significant returns. (See Chart 1 below)
There have been 14 times since 1929 where stock prices have declined 20% or more. On average, this has occurred over a duration of 20 months (we are already 11 months into the current period of lower prices). In each of the 14 periods, including the Great Depression, the OPEC Oil Crisis, 9/11, and the Global Financial Crisis, markets regained their losses. Even if markets take 36 months to retrace the losses from the last 11 months (using prices on 12/31/2022 as a starting point), average annual returns from this point forward would need to be 9.5% with a cumulative return of 31.3% (as exhibited in Chart 2 below, third bar).
Chart 2 Source: FactSet, NBER, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management.
Further, during 2022, consumer sentiment declined to levels commensurate with recession. Over the past 50 years this happened 8 times, and the subsequent price return in stocks in the 12-month period following averaged +24.9% (See Chart 3 below).
Chart 3 Source: FactSet, Standard & Poor’s, University of Michigan, J.P.Morgan Asset Management
Mark Twain once quipped, “History doesn’t repeat itself, but it does rhyme.” Those words ring true today. While we cannot predict how markets will work themselves out in the very short-term, we know with confidence that a long-term disciplined approach to investing wins in the race that counts.
Eric Davis, President and Chief Investment Officer