The stock market declined the first day of 2023, rekindling some of the bad memories of 2022. Despite the 2.5% bounce over the last two days of the year, the stock market fell 5.9% in December, which brought the S&P 500’s full year 2022 decline to 19.4%. It was a bad finish to a bad year. Since 1928, there have only been 6 years that were worse than 2022 for the stock market.
Yet, amid all the gloom, we believe there’s reason for optimism. Let’s take a look at the other bad years that finished on a bad note. Shown below are all years since WW-II where the S&P 500 lost 15% or more and also had a down December.
Source: Vineyard Global Advisors, data sourced through Bloomberg
What do you notice? The yellow highlights show that every single year that followed a down 15%+ year with a down December generated a positive return that averaged 21%! This is over twice the S&P 500’s long-term return of 10% per year. Of course, this doesn’t guarantee 2023 will be positive, but it shows that the level of pessimism that existed at the end of 2022 has created flush-outs in the past that set the stage for better returns the very next year. Our emotional state often tempts us to do exactly the wrong thing when it comes to successful investing.
One warning: Note the columns on the right side of the table above. To get that 21% average gain, you needed to be able to stomach some additional volatility. The average drawdown (a peak to trough decline) in the first quarter of the following year was 5.2% and almost 7.9% over the following first quarter. Looking out over the full year, the average drawdown was 12.8%.
The Takeaway: History suggests 2023 may be a better year for investors, but it’s likely to contain the kind of volatility that rekindles many of the bad memories of 2022, tempting some investors to react emotionally.
Some other Good News of a Bad Year: For Vineyard investors, the majority of our strategies had low to mid-single digit drawdowns due to our risk-managed philosophy. Because of that, they will have less of a hole to dig out of as the market recovers before getting back to making money. This compares favorably to the recovery needed to recoup from the 19% decline of the S&P 500 and 33% decline in the Nasdaq. The so-called FAANG+ stocks (Meta, Apple, Amazon, Netflix, Google, Microsoft, Nvidia and Tesla) lost 47% in 2022.
While the historic analogs and other considerations we’ll discuss in our year-end webinar suggest a better year ahead for investors in 2023, we’ll continue to follow our objective, weight-of-the evidence approach to confirm the state of the investment backdrop and adjust our strategies accordingly. These objective indicators caused us to adjust our strategies defensively at the beginning of 2022 as they warned of a deteriorating investment backdrop after remaining steadfastly bullish from just after the Covid crash low of 2020 through the end of 2021.
As always, we appreciate the confidence and trust you have placed in us to manage a portion of your wealth.
-VGA Investment Team
Vineyard Global Advisors offers a range of investment strategies designed to allow participation in the market's growth within a dynamic, risk-managed framework that seeks to protect against significant market declines. Our goal is to give our clients greater peace of mind by generating steadier returns over time. Contact us to learn more.
