For those of you who would prefer to listen:
2022 comes to an end. Good riddance. It was an eventful year, in global proportions, and a really tough one for investors. Here’s a bit of a summary of what went down in 2022:
It started out well for the Bulls but proved to be a huge fake out. The first trading day of 2022 resulted in a historic day for the US Stock Market. It hit another fresh, all-time high. That was a theme throughout 2021. Apple became the first company in history to reach a $3 Trillion value. Asset prices across the country soared. Euphoria was rampant. Then it reversed hard. A Bear Market took over. The Bear had a tight grip on stocks the whole year. The S&P fell nearly 20%. The Tech-heavy NAS fared the worst, down 33%. The Bond Market had its worst year ever, and experienced back-to-back decliners for the first time in history. There were few places for investors to hide. Bedell Frazier played aggressive defense the whole year to protect portfolios and minimize declines.
Perhaps the biggest event of the year was the Russian invasion of Ukraine. It’s been referred to as a Black Swan event, meaning nobody saw it coming. That said, Vladimir Putin made it clear in 2014 when he annexed Crimea what his intentions were. But a full out invasion seemed unlikely. It happened. Most intelligence officials believed Kyiv would fall to Russian forces in just days. Quite the opposite. The Ukrainians fought back courageously, defending their home. It’s a supreme example of the power of who wants it more.
The Western alliance responded with coordination and collaboration. NATO is now stronger than it’s been in decades. Corporate America took a stand too. McDonald’s made a major statement by closing all of its locations in Russia. You may recall that the first Golden Arches opened in Moscow in 1990 to global fanfare. It set a record for customers served in a day at 30,000. McDonald’s in Moscow was a major sign of advancement after the wall came down. Things sure have changed. The War in Ukraine has proved to be a tactical blunder for Russia and President Putin.
The price of Oil surged to $130 a barrel for the first time since 2008. Gas prices followed. Commodity prices spiked too. The price of Wheat went soaring. The Consumer Price Index jumped 9%, marking the fastest pace of inflation in four decades. Interest rates spiked faster than any period since the early 1980s as inflation was declared public enemy #1 by the Fed. The 40-Year Bull Market for Bonds came to an end. Rates went from near 20% four decades ago to near zero at the Covid low. A new cycle was born. Interest rates headed higher.
The era of free money is over. Early in the pandemic, the Fed took interest rates to zero. It started buying up assets at a rate never before done. The goal was to stimulate spending. The crisis commitment was, “whatever it takes.” It worked. People spent. Americans wanted to buy houses, they wanted to get out of the cities and move to the suburbs. They left high-tax states in droves. Home prices spiked as demand overwhelmed supply, creating a bubble. In fact, the historically cheap and, in some cases, free money created bubble-like conditions throughout the landscape. The bubbles popped in 2022. Whatever it takes comes with a cost. 2022 brought the check.
The Market had become so used to low rates and a supportive Fed, kind of like a spoiled kid always getting their way. It all started back in the Financial Crisis of 2008. Easy money was like a magic elixir for assets. The change has been abrupt and the spike in rates acted like a shock. The yield curve inverted for the first time since the Financial Crisis. We’ve seen the Fed try to tighten over the years, but it always backed off when the Market got rattled. You’ve seen those spoiled kid tantrums. They’re not pretty. Tantrums became the norm. Inflation was never an issue before. It was in 2022. The Fed went toe-to-toe with the Market. The Fed has not flinched. The Market keeps fighting back. The Market got super-spoiled in 2021. The Market ain’t spoiled anymore. The Fed likely flinches in 2023.
Activity in the Housing sector was heavily influenced by the Fed’s aggressive rate hiking cycle. 30-Year mortgages hit 7% in the Fall. They’ve since settled down in the low-to-mid 6% range. But monthly mortgage payments jumped significantly in a short period of time. That was another shock to the system. According to the Mortgage Bankers Association, median home payments across the country jumped 43% in 2022. As I’ve stated time and again this year, a 7% mortgage buys a lot less house. Buyers fled. Prices fell.
A cooling Stock and Housing Market is just what the Fed wanted in terms of lowering inflation and economic activity. The Fed was complicit in the bubble build. The Fed made certain it played a key role in the bubble burst as well. Fed Chair Powell made it clear in Jackson Hole; The American people will feel pain. Pain sure has been felt, from coast to coast.
Bear Markets are designed to clear out the excesses in the system. It’s worked. There were serious excesses everywhere in 2021, rivaling the Dot-com days. That came to an end. Companies have been forced to curb spending and control costs. That’s the responsible thing to do in running a quality, sustainable business. But executives still need to invest in future growth. Companies need to continue to innovate and find new methods of getting products and services to customers. Quality companies are doing just that, but in a more responsible way.
Investing for beyond the now is still a thing. It sure can be hard to do in challenging environments. But it’s the right thing to do if done responsibly. That’s where opportunity lives. The Tech Titans saw their stocks get hit hard in 2022. This was fairly novel, given that they had been considered untouchable for over a decade. Reality finally set in on valuation, but the business models for many remain very much intact. Here’s an example of how the commitment to innovation and growth is continuing:
Amazon just launched its Prime Air drone delivery project in 2 locations: Lockeford, California (50 miles from Sacramento), and College Station, Texas. The Federal Aviation Administration approved it back in 2020. Customers can see Prime Air-eligible items on the Amazon site and app. Orders are entered regular way. Customers then receive an estimated arrival time with a status tracker. For these Prime air deliveries, the drone will fly to the destination, descend to the customer’s backyard (if they have one), and hover at a safe height. It will then release the package and rise back up to return to the fulfillment center to get its next delivery assignment. It’s pretty wild considering the possibilities. Amazon is playing catch-up here.
Alphabet (Google) launched its drone delivery service, called Wing, back in April. Australia has been a large testing ground. Texas is the primary market for Wing in America. The program began back in 2014. Wing’s mission is to optimize the delivery industry in order to match the appropriate package with a similar-sized vehicle. Roughly 90% of packages delivered across the country weigh 5 pounds or less. The company has different-sized drones capable of carrying various weighted products. Wing primarily delivers pharmaceuticals and other small packages today. It plans to expand in size next year.
Walmart also has a drone delivery program. It’s currently in circulation around Dallas, Orlando, Phoenix and Tampa. It delivers daily items to customers in as little as 30 minutes or less. The slogan is, “if it fits, it flies!” Pretty cool slogan. Walmart plans to expand the program next year to Arkansas, Utah and Virginia, with the goal of 1 Million drone deliveries in 2023. Innovation keeps taking flight.
Back to the Market: There was some positive Market momentum heading into 2023. It might not have felt that way, but there was. Q4 was the only positive quarter for the Stock Market in 2022. That came after hitting new lows in October. It closed the year well off the lows. The Bond Market got hit hard too, but has shown serious signs of stabilization heading into the new year. The 10-Year Treasury started 2022 yielding 1.5%. It ended the year near 4%. Remember, higher yields mean lower Bond prices.
Bear Market rallies can be as ferocious as Bear Market declines. It’s part of the deal for investors. Bear Markets leave their mark. But they don’t last forever. We expect the volatility to continue with wide swings, both up and down, in 2023 as this Bear runs its course. We will cover it in our 2023 Outlook piece next week.
New Year’s is about promise and opportunity. For many, it’s like a re-boot. It’s a new day. It’s aspirational. The hope is a better tomorrow. New Year’s resolutions tend to reside around losing weight, exercising more, quitting a vice and/or trying new things. Perhaps being nicer to others is on the list too.
Investing for a better tomorrow is Bedell Frazier’s professional purpose. There are many ways we aim to do this. Our goal is to have these investments reflected in our portfolios and in our service, in our community involvement and in our core values. Our brand stands for clear messaging and personalized service. Our brand stands for honesty, integrity and hard work. Our brand is built to last. Past, present and future, that ain’t going away.
Happy New Year!
The Market is closed on Monday in observance of New Year’s Day. Our office will be closed too. We will be back, dark and early on Tuesday. We look forward to serving you in 2023.
Mike & the Bedell Frazier Gang