2022 has been a significantly down year. The Dow finished down 8.78%, S&P down 19.44% and NASDAQ down 33.1%. For further stats see marketwatch or Forbes.
From an early age, I have memories of observing my father reading the newspaper in a ritualistic fashion. Ronald Shink had ongoing commentaries regarding what he saw as right and wrong in business, politics, and investing. He would often be ranting with anger about a perceived wrong or injustice. Just as frequently, he would be provoking uncontrollable laughter with humorous takes across a wide variety of subjects and daily living situations.
The idea that life could be improved through the vigorous consumption of newspapers, books, and magazines was ingrained in my subconscious and conscious mindset. Long sessions of discussion to the point of great excess regarding current events, public personalities and investment ideas became the standard way for me to reason with the world. The influence of such an incredible mentor seeded the desire deep in my soul to become a competent investor and businessman just like Pops.
30 years ago, when I began this journey as a professional advisor, Bill Clinton was president, the S&P finished the year at 435, and The World Wide Web was accessed via modems over phone lines. Distant memories of a “car phone” that was carried in a bag, contrast with the supercomputer that most now carry in pocket or on their wrist. The “Dot Com Bubble” was forming, and investors were interested in the latest tech IPO. Google was founded in 1998 and would not go public until 2004.
Mortgages in the 1992-time frame ranged around 8%. Bank CDs were paying between 3-4% and gasoline was below $1.40 per gallon. Documents and brochures were something that we spent time monitoring inventory as updates became available.
The digital “answering machine” was becoming common and the DVD was introduced by Toshiba in 1994. Fears of Y2K were beginning to form in the late 1990’s in what turned out to be one of the biggest non-events as the new millennium dawned. George W Bush emerged from a contentious election, a Florida recount and a US Supreme Court decision that ultimately settled the contest. See the “Brooks Brothers Riot” for echoes of January 6, 2020.
9-11-2001 was a moment where I remember thinking that the world could never function effectively again. The heartbreaking death and destruction were unimaginable as so many lives were destroyed. The market was closed for four trading days and went on to struggle for about three years. Fears rippled through the mind for the months and years after the horrendous attacks. The response of military endeavors in Afghanistan and Iraq led to great difficulty and murky retribution. The Bush presidency saw a peak of popularity after the attacks but was unable to articulate a strategy that sustained the support and proceeded to an ignominious and muddled conclusion.
During an historic bear market, Barack Obama won the presidency by defeating John McCain. The 2008 election witnessed the drama generated by the nomination of Sarah Palin as John McCain’s running mate. Sarah was caught off guard by seemingly simple questions. In an interview with Katie Couric in September 2008, the then vice-presidential candidate, whose foreign policy credentials were questioned, was asked, “What newspapers and magazines did you regularly read before you were tapped for this – to stay informed and to understand the world?” Palin declined to name one single newspaper and then went on in a jumbled and nonsensical manner, sadly to this very day.
The Obama presidency produced markets that delivered significant gains, although the starting point had been quite low. The nickname “No Drama Obama” is quite appropriate as there were few scandals or controversy beyond the unique nature of the first black president of the United States. The sad backlash was a stark reminder of the struggles with race that have been a challenge throughout American history.
The eight-year Obama presidency never got around to developing a clear successor. Hillary Clinton emerged as an overwhelming favorite to be the first woman president of the United States. The 2016 election outcome won by Donald Trump proved that the House of Clinton was much more vulnerable than modern political polling could detect.
The rural population that has been profoundly impacted in the era of globalization still wields great power in the electoral college system that determines presidential elections. That power was not enough to reelect the unconventional and oftentimes chaotic novice that I have often referred to as “The Apprentice Presidency Season One.” Sadly, this was a period of unbridled grievance. The peak of these angry dynamics may be passing as people ultimately tire of the drama. Hopefully, a “solution mongering” candidate will emerge soon.
Say what you will, the Biden presidency is a bit short on charisma or articulation. We will always have Joe’s “ambitious agenda”. There have certainly been thousands of new pages of federal legislation. It is admirable to advocate transition to cleaner forms of energy and domestic production of semiconductors, yet these mandates have been paired with protectionist provisions. It is unlikely that much of this agenda will persist as most of the legislation has been passed along partisan lines. Shifts of power and new regimes will potentially override the progressive elements of recent actions with conservative or populist initiatives.
Suffice to say that seeking reassurance from the American federal politics and leadership will lack solace and continuity. The pendulum will continue to swing as election cycles throw the bums out and replace them with new villains that can be then thrown out again.
The world is objectively the best place it has ever been for humans to exist. By most statistical measures living standards are higher than they have ever been. It is also a harsh reality of perpetual crisis and challenge. Bad news activates the human cognitive bias of alarmist and survival instincts. The velocity and volume of information increases on a daily basis and creates all manner of negativity. Meanwhile, Solar power capacity around the world is on track to roughly triple over the next five years and overtake coal as the leading source of power globally. Exciting technical breakthroughs — such as M.I.T. researchers’ developing a way to produce thin and flexible solar panels are moving towards commercial viability.
The investment landscape is perpetually laden with reasons for concern. Reviewing past markets provides a constant reminder of all the trials and tribulations that investors face. The rewards are slow and never certain yet have always seemed to arise. Creating a thirty-year chart, we can see that through all the challenges, investors have been rewarded for perseverance.
| Year | Headline Event | S&P Index at year end | $10,000 invested in S&P on 1-1-1992* |
| 1992 | 10M unemployed, record deficits | 435 | $10,762 |
| 1993 | World Trade Center bombed | 466 | $11,847 |
| 1994 | Fed raises rates six times | 459 | $12,003 |
| 1995 | Anemic Economy | 615 | $16,513 |
| 1996 | Tech downswing | 740 | $20,305 |
| 1997 | Asian financial crisis | 970 | $27,079 |
| 1998 | Long Term Capital fails | 1229 | $34,818 |
| 1999 | Y2K fears | 1469 | $42,145 |
| 2000 | Dotcom bubble pops, Bush prevails | 1320 | $38,308 |
| 2001 | 9-11 | 1148 | $33,755 |
| 2002 | US corporate accounting scandals | 879 | $26,295 |
| 2003 | Iraq invasion | 1111 | $33,837 |
| 2004 | Oil prices soar | 1211 | $37,519 |
| 2005 | Devastating hurricanes in southern us | 1248 | $39,362 |
| 2006 | Falling US job market and housing prices | 1418 | $45,479 |
| 2007 | Subprime crisis | 1468 | $48,083 |
| 2008 | Sharp US recession | 903 | $30,293 |
| 2009 | US unemployment hits 10% | 1115 | $38,311 |
| 2010 | Gulf of Mexico oil spill | 1257 | $44,081 |
| 2011 | European debt fears | 1257 | $45,012 |
| 2012 | US “Fiscal Cliff” | 1426 | $52,216 |
| 2013 | Obama Care shaky rollout, QE enters fifth year | 1848 | $69,128 |
| 2014 | Crisis in Syria | 2058 | $78,590 |
| 2015 | Greek debt restructuring | 2043 | $79,678 |
| 2016 | US election surprise, Brexit | 2238 | $89,207 |
| 2017 | Unfunded tax cut is US, Tariff policies begin | 2673 | $108,68 |
| 2018 | “Trade wars are good and easy to win” | 2506 | $103,917 |
| 2019 | COVID-19 begins | 3230 | $136,637 |
| 2020 | Lockdowns yet market has big year | 3756 | $161,777 |
| 2021 | Supply chain disruption, inflation appears | 4766 | $208,215 |
| 2022 | Inflation flare, Ukraine war | 3844 | $180,930 (as of 11/30/22) |
Average annual return from 1-1-92 thru 11/30/2022 = 9.82%
* Data provided by Capital Group. Hypothetical investment in S&P 500. Above return numbers assume all dividends are reinvested and now withdrawals taken. Balance on 12-31 of each year. Above hypothetical is for discussion purposes only and is not a recommendation. Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Investors should consider their willingness to keep investing when share prices are declining. Market indexes are unmanaged and, therefore, have no expenses. The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. The S&P 500 Index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 Index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall U.S. equity market. Over 70% of all U.S. equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector. Above numbers may have calculation errors and should not be relied upon without additional exploration.
Shink’s Rules:
Think-Long Term, Succeed Long-Term
Behavior determines results
Study history
Courage, patience, and process will create a better future
Wealth is for living, never sweat money
Pay for Information – subscribe; the “internet’ is not a source.
Aggregate multiple information sources before drawing conclusions
Markets and news flow will always provide reasons for worry
For investors, rules and philosophical principles that can be relied upon through scary events that consistently occur are crucial. The chaos that is human civilization does not foster feelings of comfort. The Human brain has a very difficult time contemplating five months, let alone five years into the future. Belief in the historical rewards that have been garnered from diversified portfolios is the foundation to potential success.
The economic landscape on 1-1-22 was over extended and has been reined in. Markets may have further to fall in 2023. The pandemic upswing was artificial, and we have now been reset back to levels near the pre-pandemic market values. Price inflation has combined with the catastrophic Ukrainian invasion to erase recent gains. The fed has continued to undo the massive stimulus that was deployed during the pandemic. The rise in interest rates has been one of the most rapid upswings in the cost for money in modern history. 2022 has been a year where inflation data has dominated the market psyche.
The inflation spike of 2021-2022 has whipped central banks into a posture that seems to indicate little regard for recession risk, unemployment, or market stability. Meanwhile, economic data is showing improvement and there has been a deceleration in price levels. It is possible that the Fed will go too far and there will be a recession in 2023.
Lots of talk regarding places to weather the storm is flowing in the financial media. The problem is that seeking “stability” forces you to make multiple decisions about when to re-enter positions that have more long-term potential. The decision sequence of seeking safety and then returning to a diversified portfolio forces multiple decisions with significant potential for poor timing. For those that stay invested, there can be dividends reinvesting at discounted rates. The other crucial advantage of patience is that portfolios are intact when the next upswing begins.
The market mood has turned largely negative. That is likely a sign that a significant portion of the market damage may be done. The potential for economic upswing is vast. The shift to electric vehicles has sparked a building boom of new plants that are engineered from the ground for a new category of automobile. The economic potential for transportation based on electricity is vast and has been likely severely underestimated. Likewise, for the domestic production of semiconductors, which is being fostered by new federal legislation passed in 2022 that provides significant incentives for domestic production.
Federal initiatives that attempt to shape the economy can prove to be significantly impactful over time. The scale of offshore manufacturing has been one of the most powerful trends of the last thirty years. While there have been broad gains from globalization, the hollowing out of domestic manufacturing activity has all manner of consequences that the US may ultimately address. Coherent industrial policy is uncommon in US history. Tax code incentives and military spending have been the main arbiter of where industrial development has been fostered.
The transition from old incentives that subsidized fossil fuels to support for innovation in cleaner energy generation is a difficult path. Former dominant energy producers are existentially threatened by these changes, and they will fill the debate with anything that can prolong the profitability of the legacy enterprises. This battle masks the progress that is being made in both reshoring and refinement of global supply chains.
The human mind yearns for clarity in a world filled with complexity and randomness. For investors this can lead to the misbegotten notion that our decisions are something like moves on a chessboard where the options can be identified and smart, rational choices can lead to success. The process of investment success has gambits, but also includes numerous unknowns and surprises that are rarely “beaten” or “outplayed”.
The WSJ recently published an interesting piece on Hindsight Bias. The article notes: “Countless hunches and gut feelings flicker through our consciousness over the course of a year. We naturally remember the ones that turn out to be right. The multitude of other hunches that turn out to be wrong go into our mental garbage can.” Interestingly, survey respondents mis-remember their predictions in favor of what actually happened. Here again is evidence that our memory is biased by all sorts of ego and fundamental attribution error dynamics.
The tricks that are played by the human brain are endlessly challenging to the investment process. Hindsight bias and fundamental attribution error are two common elements found in all manner of thinking errors. Financial advice faces endless challenges to its effectiveness in conversations where people misremember all of their flawed ideas while maintaining that they had somehow figured out issues in real time.
Apple entered the MP3 player arena with the original iPod in October 2001. There was no sign that it was the starting point of one of the greatest investment opportunities of the tech investment era. Shares of APPL were valued at a level reflecting that of a computer company with a unique interface that was used mostly for education and creative work. There were few indications that this was the beginning of a communications juggernaut that has become the most highly valued publicly traded company in the world.
Backward looking commentary has anointed Steve Jobs as one of the greatest innovators in the modern technology era. As deserving as Steve may be, this storyline ignores the moment in history where cellular technology arrived and created ubiquitous connectivity. These networks ushered in a world of possibility for small telecommunications and mobile computing to blossom. Very few investors could have anticipated the transformative nature of ubiquitous high speed cellular networks.
There were many attempts to create a handheld device that flopped before the era of robust cellular networks. The people around the development of the Apple Newton were operating in a much different era beginning in 1992. Cellular technology was available with uneven geographic distribution and reliability. Mobile telephones were a niche industry for specialty applications and the consumer market was minimal.
The genius gap between the Newton developers and those that transformed the iPod platform into the original iPhone may not be as large as it appears. “Right place / right time” comes to mind with great frequency as we examine technological breakthroughs, hit products, and all manner of business success.
For investors this is a crucial lesson for our path along the road of opportunity. Blackberry, Nokia, Motorola, and all manner of competitors have fallen by the wayside. The Palm Pilot is a footnote in tech history, yet it was known as an incredible device. We must stay patient with a broadly diversified portfolio as it is unlikely to pick the big winners. Business history is an important consideration as we endure the bear market of 2022.
Investing is subject to endless surprises and setbacks. There are events that happen off the board (Ukraine) and infinite amounts of unknown factors (pandemic labor market disruption) that are impossible to calculate. There are numerous examples of money managers that achieve great results and then revert to mediocrity. This is due to the unknowable pace and texture of the future.
The global economy has persevered through a six-year span of populist uprising that witnessed the election of a U.S. President with no political leadership experience. Brexit was another exhibit of simplistic ideas with little substance. There now seems to be a slowing pace of turmoil as witnessed by the midterm election defeats of numerous candidates with questionable credentials and policy prescriptions.
Transparency, evidence, and accountability are foundational elements that allow the American democratic system to flourish. The peaceful transfer of power and faith in legitimately run elections was something that was taken for granted throughout the majority of American history. Election fraud accusations have been frequent while evidence has been non-existent. There is precedent for this in American History. The famous Wheeling, WV speech by Joseph McCarthy contained the line, “I have here in my hand a list of 205 . . . a list of names that were made known to the Secretary of State as being members of the Communist Party and who nevertheless are still working and shaping policy in the State Department…”
McCarthy proceeded to destroy numerous lives and careers without ever producing any such list. The era of accusation of communist association without proof had profound consequences beyond the censure of McCarthy followed by his rapid decline and death from alcoholism.
There are many parallels in the last six years of reckless proclamations and political demonization without data or documentation. Blaming foreign competitors, political opposition, and immigrants for the problems that we face is an empty tactic of a chaotic one term presidency. The term ended with a riot at the capital. It is unfortunate as the period could have been so much more productive. The Republican Party failed to channel the neophyte brand builder. Instead of placing guardrails, the conservatives made excuses and the outrageousness spoiled what could have been.
We can study all manner of cowardice during the run of the Red Baiting era as those who could have said and done more (Eisenhower, Taft) avoided the subject in hopes that it would run its course. From 1950 to 1954 the country was roiled and distracted from its real challenges by a grievance mongering demagogue. It has been argued that the damage was long lasting.
In the Pulitzer Prize winning book, “The Best and The Brightest”, by David Halberstam, it is theorized that the era of redbaiting can be directly linked to the catastrophic Vietnam endeavor of the United States. Leaders in the 1960s were fearful to be accused as soft on communism. This fear was a tragic dynamic that resulted in over 58,000 Americans sent to die in the jungles of Indochina.
The damage done by recent demagogic recklessness has significant economic risks. Blaming China for problems faced by the American economy, without any policy solutions or strategies regarding the challenges of globalization does no good. Denigrating immigrants for the plight of American workers, without offering a centrist path that shows respect to the slogan on the Statue of Liberty and instead ranting that building a wall could offer better times is pointless. Fostering doubt in the minds of voters that their participation in our precious democratic system is not worthwhile will have ramifications to our society and our economy for years to come.
The current leadership has done little to clarify or stand up to the recent demagoguery. The trade war impetuously begun by the previous president has not been undone. We have heard little about its failure or the relationship of tariffs to inflation. Signs that this era of American politics is waning are emerging and the stage seems set for new personalities to hopefully emerge.
Bear markets historically run from one to three years in duration and can cascade farther down then you think possible. Buckle up as 2023 will unfold with new tests for our fortitude. The geo-political drama is irresistible to discuss but the fatigue of these political commentaries is substantial.
There may be some very positive catalysts in the coming quarters as we all wish for ceasefire in Ukraine. The plateau and possible decline of inflation will arrive sooner or later. There is also a significant move of diversification from reliance on China to a system that includes more countries. It is even possible that acceleration of manufacturing activity here in the good ole USA will be revealed.
The world view of a Stoic has much to offer investors with the fundamental premise of detachment.
“There is only one way to happiness and that is to cease worrying about things which are beyond the power of our will.” ― Epictetus
We must remain vigilant in the face of transient emotions that arise every time the market goes into an extended downswing. Our fundamental task is one of courageous patience with the understanding that history has rewarded the long term buy and hold process.
I look forward to remaining your advisor for multiple decades. Each and every one of my precious clients deserve the best that I can offer, for as long as I am able to do it. I thank all of you for joining me on this journey.