A New Year and New Opportunities
January 4, 2023
Let’s not beat around the bush – 2022 was a tough year to be an investor. The S&P 500 Index was down almost 20% for the year. Making matters worse, the bonds market – traditionally the conservative portion of a portfolio that acts like a ballast – was down roughly 13% for the year.
While 2022 was a challenging year, it also paved the way for many new opportunities. For example, 2022 started with the ten-year Treasury yielding 1.51% but we are starting 2023 with this yield being 3.87%. Meanwhile an A-rated corporate bond was yielding roughly 2.50% at the start of 2022 and is now yielding over 5.00%. These relatively dramatic changes in interest rates are a welcome development for individuals living off the income being produced by their portfolio. Furthermore, after almost a decade of anemic yields, bonds are back in fashion and should allow for more balanced portfolios.
Meanwhile, the S&P 500 Index entered 2022 with a valuation multiple, as reflected by the Price-to-Earnings ratio, of almost 26x on a trailing basis. This had fallen to 18x by the end of the year. A similar decline in valuation ratios can also be seen on forecasted earning, meaning that even accounting for the potential of slower growth in 2023, the S&P 500 index looks relatively cheaper.
So, what does all this mean – with higher interest rates and lower valuations, the potential returns in the market have increased. Many of the major banks have been updating their capital market assumptions, and we are seeing their anticipated returns on various asset classes increasing. For example, JP Morgan has increased their long-term forecast for US large cap equities to a 7.90% compounded return, up from 4.10% in 2022. Meanwhile their outlook for bonds, as reflected by the US Aggregate Bond index, is for a 4.60% compounded return, up from 2.60% last year.
Therefore, while I believe there was a collective sigh and thoughts of “good riddance” at the end of 2022, it has paved the way for new opportunities. We are starting the year at lower valuations and higher yields, which theoretically should increase the potential returns and allow for higher income generation. While markets will likely remain volatile, investors should take this opportunity to rebalance portfolios and focus on the long-term potentials that opened as a result of a challenging year.
Wishing you all a very happy and prosperous new year.
Jeff Witt, CFA, CFP, CIPM
President & CEO
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