If you’re a financial advisor or a fund manager and you didn’t drop 20% last year, you basically won. The S&P fell in a 20% bear market while the Nasdaq plunged nearly 40%. Bonds fell double digits as an asset class. International stocks, while outperforming US stocks and not falling as much, still fell a lot. Except for Turkey, which inexplicably doubled last year, here is the TUR ETF, up 99% in 2022.
I’d google it to find out why, but I don’t feel like it. Maybe there is no reason at all.
The Dow Jones Industrial Average is down less than 10% thanks to a greater weighting toward energy stocks, but no one owns the Dow Jones the way people own the S&P 500. Proof? The SPY ETF is $356 billion and the index has hundreds of giant ETFs and mutual funds tracking it. The DIA, the Dow Jones version of SPY, has less than a tenth of the AUM ($29 billion) despite having been around for just as long.
Anyway, the silver lining of this bear market for us is that we have to show the capabilities of all the custom indexing and daily algorithmic tax loss collection that we’ve been doing. Plus the benefit of executing a tactical strategy on tax-deferred accounts alongside our long-term positions. Plus, we raised a ton of money from new clients who had gotten into this mess without a great adviser, a financial plan that worked, or no clue on how to mitigate risk in a portfolio. We don’t support bear markets, of course, but we make sure they pay off when exiting. And it’s good to have positive and productive actions to take in a blood red bureaucracy. This is already the seventh bear market of my career, we know how to get through these things and what to do while we are in it.
So, all things considered, this hasn’t been fun, but it’ll all work out in the end. It always does, as long as no one does anything stupid or irreversible on our watch.
I was thinking about the hierarchy of people who have been really affected by the events (and price action) of 2022 and I think I would put employees of tech startups at the top of my list.
The basic worker of a startup has probably received much of their compensation (and daily motivation) in the form of stocks and stock options in recent years. In some cases they have even paid the taxes in advance so they don’t have to worry about profits later. For this cohort, now looking at loads of worthless or near worthless stocks in thousands of companies, it’s been a horrible experience. The layoffs won’t stop until the VC funding markets become more forgiving, and they won’t for the foreseeable future. Capital has gone from being cheap (or even free) to being very expensive. There is no appetite for this type of risk at this time. When the world’s largest company is about to lose half its market capitalization (as Apple seems to be heading, right now), how the hell could there be demand for the stock for a pre-revenue whiteboard idea? disguised as a business?
Remember the days of “Oh, you’ve got a slide deck and a former Google employee, here’s $80 million in seed capital”? Well, these days it’s the opposite. Without seeds. Get away from my window.
Young people who have flocked to these types of companies are going to feel this uncertainty more. The layoffs have only just begun. Next are the winds. This is when a business is so hopelessly unprofitable and unlikely to be funded that the only responsible option is to simply stop. Take what’s left of the bank, return it to the investors and leave the keys. It takes years for this process to cleanse the ecosystem of excess and establish the next generation. The people with staying power to hold out until then either come from family money or have already been the beneficiaries of an outing or two from a previous cycle. You know who they are. They’ve got seven figures in the bank and are willing to spend their time polluting Twitter with aphorisms and half-remembered Clay Christensen threads about the hard of hard things. They will podcast and pontificate about Ukraine until the Fed caves and the money spigot is turned on again. Mortimer, we’re back!
But the workers are a bit screwed at the moment. They probably didn’t cash out or take any risk off the table like the founders have. They had to put it all in the black and keep it there while they waited for word on the next round of funding. That news does not arrive. And there’s nowhere to go right now, even in an economy with one of the tightest labor markets in history. The biggest tech, media and telecommunications companies are freezing hiring or laying off staff, so swimming to a bigger ship probably won’t help much in the short term.
After startup workers, I’d probably feel more sorry for mortgage brokers and real estate agents. They were building one of the most exciting bubbles of activity and action the real estate market has ever seen. An upward cycle of twenty years, all packed into a span of just twenty months. My favorite local real estate agent started filming herself trying on Gucci belts in the mirror. And post it.
The years 2020 and 2021 could have been two of the best years of all time for the housing sector. Home prices rose 40% and finally peaked in June 2022. Since then, it has gone down. Prices have to fall further to catch up with prevailing rents. Existing home sales have already begun to plummet. Sellers have nowhere to go and don’t want to borrow at 6.5% again. Buyers cannot rationalize the massive increase in borrowing costs. Contractors can still sell newly built homes because inventories are so tight, but the gains from selling a new home relative to the cost of building it are nothing special. The market has frozen deep. refinancing is done. Demand for mortgages is falling off a cliff. Transactions are disappearing. It will get worse this spring. The offsets relative to last spring will be ridiculously bad.
Here are FirstTrust’s Brian Wesbury and Robert Stein writing about the housing market:
The real effect of the change in interest rates is evident in the existing domestic market. Sales reached an annual rate of 6.65 million in January 2021, the fastest pace since 2006. But, in November 2022, sales slowed to an annual rate of 4.09 million, a drop of 38.5 % Until now. Meanwhile, a decline in pending home sales in November (contracts on existing homes) signals another drop in existing home sales in December.
Existing home buyers have two main problems: First, much higher mortgage rates, which means substantially higher monthly payments. Assuming a 20% down payment, the increase in mortgage rates and home prices since December 2021 equates to a 52% increase in monthly payments on a new 30-year mortgage for the existing median home.
You can get the rest of your housing comment here.
So if you know an employee at a new company, be nice and offer to circulate their resume. And if you know a residential real estate agent who wasn’t prepared for the environment of 2021 to change so abruptly, give them a hug, they could use it right now. And if you know a mortgage broker, well, maybe you’ll just walk across the street when you see him coming. No eye contact. Just let them pass and say, in a low, reverent voice, “There, but by the grace of God, I go.”
It’s a tough environment for most people right now. Try to remember that it could always be worse.
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