Happy New Year Everyone!
We sincerely hope you all have enjoyed your holidays and are looking forward to good things this coming year. We wanted to start the year with a nice communication, something positive. Had to think for a bit.
Rather than lament the year gone by, we thought we ought to start with something big and historic and really interesting that is going to be a huge part of what happens in the world for the rest of our lives and well beyond. Some good long-term developments, along with lots of challenges and risks; they always come as a package.
I have to admit I was shocked by what I read in a recent article in The Economist about China and India. Obviously, I knew these have been the two biggest countries in the world, in terms of population, for hundreds of years; they were the biggest emerging market economies; and seem destined to play a major role in the future of the world economy for the foreseeable future. I also knew India’s population was growing faster than China’s.
I did not realize that this year (sometime in April according to the UN), India is set to surpass China in population and become the largest population on earth! Was I the only person not paying attention? It also recently displaced Britain’s economy as number 5 in the world (China is number 2).1
Both countries are expected to have about 1.4 billion people this year but going forward, they look very different. As the article describes with some nice charts and graphs, China’s population is aging and shrinking, while India’s is young and still growing.
And as we have discussed quite a bit recently, the world is reorienting supply chains away from China after the spate of troubles we have suffered, not to mention the threats China makes and the intellectual property they steal. India has been and seems likely to continue to be a major beneficiary of that process.
OK, I guess we have to take a quick look back at 2022, darn…
At the beginning of last year, there was a fair amount of optimism on Wall Street. Many expected inflation to be “transitory” and Fed policy to be relatively benign, perhaps a slow series of small rate hikes.
As we now understand all too well, inflation was not transitory–massive spending by the federal government, fully funded by the Fed’s printing presses, resulted in substantial inflation for the first time in decades. And an energy crisis exacerbated by Russia’s attack on Ukraine did not help.
And so, after waiting too long and being too loose, the Fed was forced to tighten aggressively. As we noted in recent letters, this tightening cycle has been the fastest and gone the farthest in decades. There were some lonely voices (e.g., economist Mohamed El-Erian, whom we cited several times) sounding the alarm as the money gushed forth and the Fed lost its way, but the train wreck happened anyway, right before our eyes.
So here we are, entering 2023 with inflation still high, although recent data has trended favorably. The Fed has slowed the rate of tightening, but it is still tightening; we are not done yet. This will be a critical year in which we want to see inflation slow down substantially, and hopefully without a serious recession. But we won’t know for a while, and it is entirely possible we will get the worst of both, continuing inflation and a recession.
Gee, thanks, and Happy New Year to you too!
Sorry, but we had to get it over with. Bond yields finally rose after so many years of low rates, with the 2-year Treasury ending at a yield of 4.41%, a lot higher than the 10-year yield of 3.88%.2 An inverted yield curve, thought to forecast a recession. Bonds had their worse year in decades.
Equities were down across the board. The S&P 500 index was down 18.11% for the year, although it rose 7.56% in the fourth quarter, a nice little recovery.3 The one bright spot was energy, which rose 59% in 2022–for the first time, there was only one positive sector in the S&P 500 for the year.4
It is very important to note that value outperformed growth by a lot last year. As we discussed a year ago, the overall market was not necessarily expensive, but valuations of growth stocks, especially “Big Tech,” were high. This year, those were the stocks that fell the farthest, while value stocks did not do too badly.
Source: Morningstar Data as of 12/31/22.
By staying well-diversified, not chasing after whatever performed best and garnered headlines recently (e.g., Big Tech/growth), rebalancing into your target weights for various types of equities and bonds, you maintained your exposure to the things that performed well, and avoided having too much of past performers heading for a fall. It is a long-term winning strategy. Like sleep, exercise, and a healthy diet–not magic, just good discipline, and good long-term results.
Happy New Year!
Best Regards,
Roger
- Unger, Brooke. “India Will Become the World’s Most Populous Country in 2023.” The Economist, 14 Nov. 2022, www.economist.com/the-world-ahead/2022/11/14/india-will-become-the-worlds-most-populous-country-in-2023? Accessed 3 Jan. 2023.
- “Daily Treasury Par Yield Curve Rates.” U.S. Department of The Treasury, 9 Dec. 2022, https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202212. Accessed 3 Jan. 2023.
- Source: Morningstar Data as of 12/31/2022
- Pound, Jesse, and Samantha Subin. “Stocks Fall to End Wall Street’s Worst Year Since 2008, S&P 500 Finishes 2022 Down Nearly 20%.” CNBC, 30 Dec. 2022, www.cnbc.com/2022/12/29/stock-market-futures-open-to-close-news.html. Accessed 3 Jan. 2023.
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