If investors are to learn anything from the grim experience of 2022 in markets, it should be How To Be An Optimist.
This is not easy, especially while enduring repeated negative news in the last year about, well, everything that matters to asset prices, including inflation, central bank policy and geopolitics to name three of the more significant factors. But it is not worth being miserable. As we are regrettably frequently reminded, life is just too short. So, here is my non-scientific guide.
First up, the audacity of hope is for fools. One of the most consistent features of 2022 was the repeated effort to see a break in the clouds where none existed. Time and time again — in March, in June, and in October — those of an inexplicably cheery disposition thought they could see signs that the Federal Reserve might do the precise opposite of what it has consistently said all last year, and relent on its interest rate rises.
The result was a series of ill-fated bear market rallies — ascents in risky assets embedded in broadly sinking markets and pretty big ones at that. Analysis from Goldman Sachs last year shows that those three rallies each counted among the biggest of their kind in global stocks since 1981, and the longest lasting. Some fiddly technicalities apply here; the jump in the summer was much more down to short-term investors closing out negative bets than it was about bizarrely optimistic investors deciding it was time to buy. Nonetheless, the pattern stands.
Why? “People have been super bummed for 10 months. They can’t take it any more so they are trying to be more optimistic. It’s as simple as that,” says Greg Peters, co-chief investment officer at PGIM Fixed Income. “It’s false hope, time and time again. Hope springs eternal.” This feels like a waste of energy. Don’t be super bummed.
It is, of course, easy to be wise in hindsight but some market participants say they never fell for the false hope in the first place. “My belief is that markets are unforecastable most of the time,” says Andrew Pease, head of investment strategy at Russell Investments. The rare occasions when they are forecastable, he says, is when they are in sufficient pain for it to be time to snap up some bargains. “We have to identify times when people hurt. The last time that clearly happened was in March 2020,” he says, when credit spreads and the Vix index proxy for levels of stress in stocks shot higher.
“The debate is always around whether we have seen points of capitulation. The answer [last year] has always been no. We’ve seen some big market moves but not the really important panicky indicators.”
So that’s option one. Wait for true pain. Option two is to embrace the pain, especially if you effectively have no other choice. Alex Umansky, a portfolio manager at $48bn investment firm Baron Capital, is in that camp. One of his funds is the tech stock-focused Baron Global Advantage Fund, which has dropped by a cool 50 per cent or so last year.
“We had certainly been expecting a pullback, but the magnitude, speed and violence of this was a little bit surprising,” he says, with some understatement but no self-pity. Bluntly, he says, “we are who we are”. It is a growth fund. In a bear market. Of course it has hit a rough patch, but he says for him, the scarier period was in the massive upswing of 2020. “There was just so much money” coming in that he had to expand the number of companies in his portfolio from the standard 40 to 50 to the high 60s — uncomfortable territory.
“I was losing sleep in late 2020, early 2021, because money was coming in and there was nothing I could buy at a good price so we had to compromise on either quality or on the price,” he says. Now, by contrast, “everything is on sale. It’s like walking to a Louis Vuitton store and there’s a 50 per cent sale.” That discount could extend to 70 per cent, he acknowledges. Still, if you believe in your process, that represents some value, and a way to weather the storm.
The final option is to just keep telling yourself you’re in it for the long term. John Bilton, head of global multi-asset strategy at JPMorgan Asset Management freely admits that 2022 has been a stinker, as stocks have fallen and the typical safety net of bonds has failed. But, he says, “if you stay in the bunker too long you miss when the dust settles . . . It’s really, really important to use opportunities to enter the market.” Bilton says this might sound like advice to catch a falling knife. “But that’s only the case if we’re looking at an impaired asset,” he says.
Trying to time when to get in and out of the market is tricky, and impossible to do consistently, but catching the upswing helps. A lot. Sticking in the S&P 500 for the past two decades would have delivered annualised returns of 9.76 per cent, JPMorgan’s investment team noted in a long-term asset allocation presentation. But missing the 10 best days chops that annualised return to 5.6 per cent. Missing the 30 best days cuts it close to zero.
“We’re not saying ‘ring the bell for the bottom of the market’,” says Bilton. “But we are saying think about how to rebuild portfolios.” Sadly, I cannot guarantee a sunnier 2023. But with a little luck this kind of outlook should at least help.