If 2022 seems like the worst year since 536 AD, you’re not alone.

I don’t think many people will regret that the door was closed last year. Not only has it been the worst year for stocks since his 2008, when the S&P 500 fell more than 18% of his, but it’s also the worst year for bonds in decades, and the very worst year he’s ever had. became one. so far For a balanced portfolio (a Vanguard Balanced Index fund with an allocation of 60% equities and 40% bonds fell nearly 17%). was Many bubbles have burst spectacularly, including cryptocurrencies, memetic stocks, and speculative tech.Even so-called “blue chip” tech stocks like AppleAAPL
It took a hit because the price/earnings ratio was too high to withstand rising interest rates. In some ways, this was the market equivalent of 536 AD, perhaps the worst year on earth. That year, a volcanic eruption in Iceland plunged much of the world into darkness for his 18 months, resulting in the coldest period in 2000 years of history. Crops withered, resulting in horrific famine, overwhelming human death, misery and misery.

The good news is that we don’t live in 536 AD (it often feels that way) and the Fed has responded to inflation quickly and aggressively despite its slow start. It’s what I’ve been doing. The Fed’s target rate range is now 4.25-4.50%, exponentially higher than the zero interest rate the Fed maintained during the pandemic. As I said before, this is not your father’s Fed. His Fed in the 70s was led by the weak-willed Arthur Burns when it came to fighting inflation. In contrast, current Fed Chairman Jerome Powell has learned from these mistakes and is risking a recession to ensure inflation returns to the bottle. Inflation has eased over the last few months. Most of the rate hikes (and bond losses) are probably a thing of the past. Many expect the Fed’s interest rate to eventually hit 5.25% to 5.50%, which would be surprising if interest rates didn’t plateau at that point. If so, 2023 could be a pretty good year for both stocks and bonds.

A recession is likely. By some standards, 2022 already has one, and he could double down this year. But rarely has the media, markets and pundits around the world predicted a recession like this. Recession expectations are therefore already largely priced into equities. But it is doubtful that the Fed will be able to achieve its so-called “soft landing” goal of restoring price stability while sustaining growth. Historically, soft landings are rare, and recessions are often the price to return inflation to its historical average.

Economic upheaval and market turmoil aside, 2022 saw a quieter shift. A return from growth investing to our investment style known as value investing. Growth investing (investing in high-growth stocks that have outperformed significantly for several years and assume their extraordinary growth will continue indefinitely) is comparable at higher interest rates and gains popularity. lost. The Vanguard Growth Index is down more than 33%. Value investing, recognizing the economic reality that all businesses will eventually return to their intrinsic value, suffered losses, but far less by comparison. lasts at least 5-7 years. More importantly, value investing has been a much more successful strategy than growth investing throughout our lifetimes. For the past 100 years, value stocks have beaten growth stocks. So it’s no surprise that Warren, the world’s best investor, and his Buffett have always followed a value approach. In many cases, value cycles can last his seven years or longer, which can help investors stay value-oriented for the foreseeable future. Even if you don’t want to focus on value investing for the rest of your life, ignoring it for the next few years is not a good idea.