The first half of 2022 was a disheartening experience for all of us. As the personal Quarterly Review that accompanies this report attests, your investment portfolio experienced painful declines, as did the accounts of every single one of our clients. Each of us here has shared a similar experience as investors ourselves, and because the way in which we charge advisory fees means we suffer when our clients suffer, as a firm we have experienced sobering financial results as well.
As the third column in from the right in the chart above depicts, every single major asset class except commodities and cash experienced double-digit declines for the first half of 2022. Bonds experienced unprecedented volatility, and long-term bonds in particular saw declines that eclipsed anything most investors have ever witnessed. It was truly a bruising experience all around.
After enduring two years of pandemic, avoiding the hype of the new “roaring twenties” narrative that took possession of so many people last year, steering clear of the speculative idiocy of crypto mania and meme stock madness, and then just soldiering on through the ceaseless, mind-numbing political divisiveness of this day and age, this experience has come as a gut-punch to even the most sober-minded investors. Owners of broadly diversified portfolios everywhere are entitled to feel a little stunned, sick to their stomachs, and disoriented. That said, how we now choose to respond is crucial.
One gets the sense that many would rather not look, and that discussion feels like a depressing emotional burden they’d rather put off until later.
But forward-looking investors have to talk about it. In fact, it’s the key to moving forward and to overcoming the potential paralysis of the moment. We would welcome that opportunity, so please reach out if you haven’t already been in touch with one of us recently. We want to meet and talk.
The object is not to dwell on the unpleasantness that has already happened, or to be consumed with regret that you (or we) might somehow have known the unknowable and done something different. The object is to assess the situation from where we are now – with as much equanimity and poise as possible – and then to invest with an eye towards what the next 5-10 years is likely to look like.
As hard as it is instinctively for many to get their arms around, and as counter intuitive as it might feel, the truth is that periods of maximum pessimism have almost always presented attractive long-range opportunities for disciplined investors with the determination to act in spite of the pit in their stomachs.
As a poignant example, please take a look at the following chart of the historical peaks and troughs of the University of Michigan Consumer Sentiment Index.
Make special note of the fact that as of the most recent data point in June of 2022, that index is now sitting at its lowest point in the survey’s 50-year history – lower than in 2008 at the depths of the Great Financial Crisis, and lower than in May of 1980 when inflation was so high that 10-year U.S. Treasury Bonds were yielding close to 15% and mortgage rates were even higher than that. The mood has never been more pessimistic.
Now please make note of all those previous low points, and the subsequent results posted by large company U.S. stocks as an asset class over the 12 months following those troughs.
While nobody can know for certain what the next twelve months may bring this time, it’s certainly worth noting that the old maxim to “be greedy when others are fearful” has some significant historical heft.
Thank you for your continued confidence and trust.
Thomas G. Twombly