Marc Ruiz, Times Columnist
At this time every year I am preoccupied with constructing my anticipated investment narrative for the coming year. As an active investor and active advisor, I believe risk management and risk tolerance is malleable and best addressed when attuned for the market environment the world of markets is presenting. Going forward into 2023 my theme for the year is a takeoff from a car commercial from the '90s, using the slogan “It's not your father’s Oldsmobile”, only I’ve changed it up a bit to “This might just be your father’s financial markets.”
For 14 years, following the 2008 financial crisis, the world economy has persisted in the most uncommon state of existence. In response to the '08-'09 crisis, the central banks of the world suppressed interest rates, liquified markets through quantitative easing and tweaked banking rules to create an environment where bonds without yields and stocks without profits were able to attract capital and reward investors with positive returns.
While investing is never entirely easy, over the past decade as a near continual flow of new money, created by the Fed, flowed into markets, investing for traditional savers eventually progressed to a point dominated by passive indexing, in which the most important decisions investors had to make seemed to simply break down to which passively indexed asset class to select. Pursuits such as fundamental research, credit analysis and security selection were deemed almost unnecessary and certainly not worth paying for, as the rising tide of an expanding money supply lifted all boats.
Then came COVID, and what was easy money policy became helicopter money policy, with zero percent interest rates, gobs of federal handouts and trillions in new money providing even more liquification to markets. While our economy survived the pandemic, as all periods of overly loose monetary policy throughout history seem to culminate with, the easy money cycle of COVID also eventually dragged our brilliant and inexperienced youth, hedge fund speculators and day traders among us into speculative excess. This time around it was electronic crypto tokens, emerging technology companies and meme stocks, all with their compelling stories but little discernible logical value, that got caught up in the speculative bubble as they traded into the stratosphere before collapsing.
Of course, there was always going to be a price for all this monetary excess, and part of that price was predictable as the worst inflation in 40 years came to bear. The advent of rapid inflation in 2022 can be likened to the moment when the lights come at the New Year’s Eve party at 3:00 a.m. A brutal reminder the party is over, tomorrow’s hangover is already here.
Which brings us to 2023. To address the inflation ravaging consumers the Federal Reserve has aggressively reversed just about every policy defining the past 14 years discussed above. Printed money injected into bonds, zero percent interest rates and a host of other more obscure mechanisms are gone. While the transition has been difficult (aka 2022), what we as investors are being presented with is both new and old, and in some ways intimidating but also revitalizing. We may have stumbled into our father’s financial markets.
For the first time in decades, conservative alternatives such as money markets, CDs and government bonds present a real alternative for investors. Going up the risk ladder just a little bit leads to investment grade corporate bonds with yields that may now even compete with the returns expected from stocks. For investors seeking growth, I believe the next few market years will favor companies with current profits, over ones projecting the potential for future profits, and companies that provide understandable products and discernable services over companies offering the potential for future opportunity and new markets. And, perhaps the thing Dad would love the most, with new tax laws targeting stock buy backs, we may see a resurgence in the importance of good old-fashioned dividends in portfolio management.
In this new market environment, I believe investing will come to focus on a market of stocks, over the stock market in aggregate, as overall stock valuations come under the pressure and opportunity to reassess afforded by higher interest rates.
Eventually the bear market cycle dominating the U.S. stock market, which I put at 14 months old now, will give way. When the dust settles, I will enjoy exploring traditionally stodgy investments such as investment grade bonds and cash and I will really enjoy investing in companies which have illustrated the ability to grow earnings and dividends predictably over time. With a potential recession on the horizon, however, I will also resist the lure of high yields on lower quality bonds, and I will continue to keep my capital in the United States, which I believe remains the “best in show.”
Happy New Year.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at firstname.lastname@example.org. Securities offered through LPL Financial, member FINRA/SIPC.