We’re a few weeks away from closing the book on 2022. Wow, what a rollercoaster year for the financial markets. New participants received a valuable education on how inflationary forces can alter asset relationships. Growth equity investors severely underperformed, as higher rates proved to be too much for high growth, non-profitable companies. Market sentiment reached historical lows, as pessimism tied to the future prospects of the global economy plagued investors. Russia-Ukraine, PMIs crashing, yield curve inversion, FTX collapse…the list goes on. There’s been no shortage of reasons to grow skeptical of the markets – but all is not lost. Cycles need time to play out. In this environment, like every other, quality security selection and proper risk management is priority one.
It was suggested to me, that I take time in December to reflect on the year. What thesis did you abandon in 2022? What did you stick with? What’s changed since January? I’ve asked myself a lot of questions but none more important than, “What did you learn this year?”
The short answer is, quite a lot. But I’ll keep it to 3 things for the sake of your Sunday afternoon. Let’s get started.
1) Regime Changes Can Happen Fast!
Regime shifts can play out gradually at first, then all at once! Just take a look at the below chart of Russell 1000 Index: Growth vs. Value. The ratio formed a new weekly closing high in November 2021, but the subsequent 12-months saw consistent outperformance from Value. In the first week of January, the ratio made a sharp move lower beneath the 30 & 40-week moving average. It’s remained in a persistent downtrend in favor of Value ever since.
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