2022 was a rough year for most investors.
Whether you favored growth stocks, value, international, bonds, or crypto, you likely suffered a significant loss.
In this article, we’ll review the year in investing and compare market performance to projections at the end of 2021.
We’ll try to learn some lessons to improve future performance.
The year started with rising inflation, a tight job market, and expectations for (mild) tightening by the Fed.
In February, things got worse—Russia invaded Ukraine.
This reportedly worsened inflation as exports from the region were slowed.
Inflation got worse and, in March, the Fed raised rates by 0.25%.
In June, the peak CPI inflation measure of 9.1% caused the Fed to post the first of four 0.75% rate hikes.
These hikes boost “risk-free” investment returns in savings accounts, treasury bills, … which makes other assets relatively less attractive.
They hurt asset prices in other ways, e.g. diverting company earnings to interest payments, as described in
“Why
do asset prices fall when interest rates increase?”
Asset prices indeed fell each time the Fed boosted rates.
At the recent December meeting, the Fed raised rates by 0.5% and signaled that the high pace of tightening may slow, potentially a positive signal for investors in 2023.
The crypto industry suffered revelations of more fraud in 2022.
In June, Celsius clients reported an inability to withdraw funds.
The CEO claimed the company had not, and would not, halt withdrawals.
Days later, all accounts were frozen, and the company filed for bankruptcy.
It appears the network was a pyramid scheme, paying old investors with money provided by new investors.
According to blockchain analytics firm Chainalysis, hackers hauled in around $2 billion in
2022 by exploiting bugs on bridges that allow users to exchange one crypto token for another across separate blockchains.
The biggest crypto story of 2022 came late in the year when FTX collapsed.
Many innocent people who thought they were buying cryptos on the FTX exchange were apparently
donating to the owners’ gambling fund; a fund which he managed to completely lose.
Poor predictions
In our “2022 Investment Outlook,”
we provided 2022 predictions from prominent institutions and individuals for US stocks, ex-US stocks, bonds, gold and Bitcoin.
We warned about the poor track record of such things, but how did they play out this time?
On average, the highest 2022 returns were projected for Bitcoin and the lowest projections were for gold.
The reality—the opposite!
(We warned in that article that Bitcoin predictions are essentially useless, and almost always biased to the high side.)
Below are 2022 returns of various assets; year-to-date as of late December 2022.
We’ll compare these to the projections in
“2022 Investment Outlook.”
Asset / Index
Return [%]
S&P 500
-20%
Nasdaq 100
-34%
iShares 20+ Year Treasuries (TLT)
-28%
Vanguard ex-US Stock Index Fund (VXUS)
-19%
Bitcoin
-65%
Gold
-1%
Stocks
For US stocks, we provided projections from 12 institutions, and 10 predicted positive returns.
Wells Fargo and Oppenheimer funds predicted above-average 13+% gains in 2022.
The best calls were from Morgan Stanley, Bank of America and Vanguard who predicted -6%, -2% and +3% respectively (still way off the -20% YTD actual).
(However, this doesn’t mean you should trust these institutions’ predictions for 2023—the accuracy of these projections is anything but consistent.)
Most institutions like Vanguard predicted better performance for ex-US stocks based on their lower valuations.
An exception was Wells Fargo.
The reality, at least as of December 18, is that ex-US stocks have slightly outperformed domestic stocks by about 1%.
(This could change by the end of the year though.)
Bitcoin
Eleven of twelve Bitcoin projections were for positive 2022 returns.
Only one predicted a price below 66,000 USD (Carol Alexander, who predicted 10,000 USD).
Eight of the twelve predictions were 100,000 USD or higher.
Fundstrat’s Tom Lee continued his remarkable streak of mispredictions with a call for 200,000 USD Bitcoin by the end of 2022—almost 1200% of the current price!
Gold
Relative to other assets, gold had a pretty benign year and mostly stayed within the range of projections, which ran from 1500 to 1850 USD per ounce.
It increased above 2000 USD when the Ukraine war started, but couldn’t hold on and fell below 2021 levels until the last 50 days.
The plot below shows the spot price throughout 2022.
Figure 1 - Price of gold throughout 2022.
Bonds
Perhaps the biggest shock of the year was the magnitude of the fall in bond prices.
I don’t even know anyone that knows anyone that predicted the amount of interest rate increases in 2022, the fastest pace of increase in modern times.
Those increases boosted the attractiveness of new bonds at the expense of old bonds, particularly long duration bonds.
Nearly every segment of the fixed income market declined in 2022.
The silver lining is that, after years of pitiful coupon rates, bonds now promise reasonable returns going forward (if inflation subsides).
Lessons learned
Perhaps the only good news about investing in 2022, aside from reducing prices for new asset purchases,
is the potential for learning.
Many lessons may be learned from the events of 2022, some of which we’ll point out here.
Macro predictions
Wise investors like Warren Buffett and Howard Marks have repeatedly said to ignore macro predictions when investing.
Doing so likely would’ve helped investors in 2022.
We all knew asset prices were high (e.g. equity valuations), yet most of us thought the Fed wouldn’t follow through with substantial tightening.
It seemed we’d entered an era of free money and infinite asset prices.
Experts abound predicted little tightening and potential loosening at some point, facilitating even more gains in equities.
As is too often the case, most of us were wrong.
The Fed raised rates faster than anyone predicted, and historically lofty valuations were quickly erased.
More humble investors like Warren Buffett partially guarded against this risk.
Unexpected events
Failed predictions are not limited to economics.
A year ago, most experts thought Russia wouldn’t invade Ukraine.
A few years ago most of us didn’t have the slightest concern of a global pandemic.
Nature is complicated beyond our predictive capabilities.
Perhaps the biggest impact on your investments will be events that no one can predict.
How can we mitigate this?
Two things: (1) diversify and (2) stay conservative in your spending.
No matter how much confidence you have in an asset, realize that unforeseeable scenarios could destroy its value.
Diversification often reduces the impact of these events, allowing you to live to invest another day.
Spending excess money on the assumption that you’ll earn high investment returns is risky.
Take a look at the
Nikkei
225 index in Japan.
After tremendous returns in the 1980s, the market has gained no value since 1990 (for 30 years)!
While not likely, it’s possible that your investments will do the same.
Will you be OK if you don’t earn any investment returns until 2050?
Be careful where you put your capital
Scams in the crypto industry remind us to be careful where we put our capital.
FTX was not regulated, and customers had no protections like FDIC insurance.
Some invested much of their money on the exchange anyway, and now face losing most or all of it.
Many were tricked into this by the number of other customers and celebrity endorsements.
While we can’t fully trust any institution, we should at least evaluate which are more or less safe than others.
That evaluation shouldn’t be swayed by celebrity comments, especially if they were paid millions specifically to lure us in.
This is particularly true when an entity promises well above average
ROI, like Celcius (and like Bernie Madoff before it).
High ROI without high risk doesn’t make sense.
If there was real evidence of such a thing, investors would flock to it and bid up the price immediately, until it lost its attractive ROI.
Investment pickers
We repeat this a lot in our articles, but here it is again: don’t blindly follow investment predictions you read online or watch on TV.
Even if it’s a “mainstream” channel like CNBC, it’s uncanny how often their experts are dead wrong.
If you want to read more on this, I recommend Howard Mark’s memo
“The Illusion of Knowledge”.
None of the institutions we are aware of were anywhere in the ballpark of predicting the actual returns for stocks and bonds in 2022.
They even completely missed the boat on relative returns, picking Bitcoin as the highest performer and gold as the lowest (again, the reality was the opposite).
Parties don’t last forever
The NASDAQ-100 had an amazing run after 2008 lows, doubling every few years.
As often happens in these environments, some people started believing this performance would continue indefinitely.
They poured money into these stocks despite extremely high valuations and slowing growth.
As usually happens, reality took hold in 2022.
Facebook has lost 67% YTD and Amazon is down over 50% YTD.
The NASDAQ-100 overall is down about 34% on the year.
No matter how great the party has been, or how long it lasted, it will probably end.
