Before we dive into today's article, I want to thank you for your patience with the Stay Wealthy Retirement Podcast these last few weeks.

There were some personal and professional things in my life that needed extra attention, including an unfortunate death in the family. 😢

As a result, I stepped away from the microphone briefly so I could put my attention where it was needed.

But it's a new year, I'm back behind the mic, and a new episode will air next Wednesday!

Thank you again. :)

Signal in the Noise

Today I'm excited to share my review of 2022.

I call these reviews "Signal in the Noise."

Why?

Signal is meaningful information.

Noise, on the other hand, is the random (often unwanted) distraction that interferes with the signal itself.

With the non-stop "breaking news" cycle, it can be difficult to maintain the long-term perspective that's required to be a successful investor.

In other words, it can be hard to find the signal in the noise.

Not to worry, though, I'm here to help!

2022 in Review

Admittedly, 2022 was a challenging year.

But there were also several positive trends and milestones that deserve our attention that I'd like to share with you today.

I hope you enjoy this and find it helpful in gaining perspective.

First, the bad news…

1.) 2022 WAS A UNIQUELY POOR YEAR FOR RETURNS

Below are the 2022 market returns as of December 30, 2022.

Stock Indexes:

• S&P 500: [ -18.11% ]
• Dow Jones Industrials: [ -6.86% ]
• U.S. Small Cap: [ -19.86% ]
• NASDAQ (Tech): [ -32.54% ]
• International - Developed: [ -16.06% ]
• International - Emerging Markets: [ -17.98% ]

Bond Indexes:

• U.S. Aggregate Bond Index: [ -12.03% ]
• U.S. Government Bond Index: [ -10.83% ]

2.) BONDS HAD A RECORD YEAR (IN A BAD WAY)

While 20% downturns in the stock market are relatively common (about one every four years), bonds are generally considered a safe haven from volatility.

This did not hold true for 2022 as it was the worst year for bonds in a century with the U.S. Aggregate bond index dropping by more than 12%.

On the upside, bonds have historically done well coming off a negative year, averaging +6.8%.

Another positive is that yields are much more appealing now for portfolio construction purposes which takes some pressure off the equity side of things.

3.) THE FED WAS EXHAUSTING

At the end of 2021, the average economist predicted that we'd close 2022 with interest rates around 0.50%.

It turns out that they missed the mark by 3.75%...

...a good reminder of why one of my core principles is that I don't believe in forecasting.

That being the case, it's natural that the focal point for investors last year was the Fed.

It seemed that every time Chairman Powell spoke, the market would drop by 2% or more.

It was brutal.

I can only hope that inflation continues to fall and that we're nearing the end of this cycle.

4.) INFLATION WAS A GLOBAL PHENOMENON

There is no shortage of politicians or Main Street investors wanting to place the blame for inflation on the opposing political party, the action/inaction of the Fed, or some other catalyst.

These simplistic answers might be valid if inflation were not such a global issue as 43% of countries experienced double-digit inflation.

With the U.S. clocking in at 7.7%, this puts us comfortably in the better half of the world.

5.) NOT SURPRISINGLY, INVESTOR SENTIMENT IS IN THE TANK

Between the Fed, inflation, and the performance of the markets, it's safe to say that investor sentiment is quite negative.

In fact, 2022 was one of the worst years on record for investor sentiment, with the only comparable year being 2008.

Need I remind you what followed 2008?

It was a few more months of pain followed by one of the greatest bull markets in history.

I'm not saying that will happen again; I'm simply pointing out that there's a limit to pessimism.

Now for some good news...

6.) EARNINGS GREW IN 2022

Most Main Street investors only pay attention to the value of their portfolio.

As a result, they often forget that we are investing in a collection of businesses.

As permanent owners of equities, we know better.

Despite the turmoil in market prices in 2022, it surprises investors that S&P earnings grew by an estimated 5.1%.

This is what we, as owners and buyers of great businesses, should be paying attention to because we are paying less per share for more earnings.

To be clear, earnings will probably decline as the Fed pushes the brake pedal further, but management teams will continue to adapt to our ever-changing environment.

It's why they are there.

7.) DIVIDEND GROWTH OUTPACED INFLATION

S&P 500 companies paid out a record $561 billion in dividends last year, which was an increase of almost 10% from 2021.

In other words, despite a tumultuous market, dividend income more than kept pace with the highest inflation in decades.

And with the cash still on corporate balance sheets, it's expected that 2023 will be another record high.

The growth of our dividend income stream is certainly something to focus on.

8.) CASH HAS CARRIED THE MARKETS

Curious why our investing experience hasn't been worse in the face of rapidly rising rates and inflation?

You can look to the balance sheets of today's consumers for the answer.

According to Bank of America, cash on hand—across all income levels—remains about 50% above pre-pandemic levels.

This cash has made consumer spending particularly resilient and acted as a buffer for both consumers and markets.

9.) DIVERSIFICATION IS BACK

As the cheap private equity money dried up, so did the returns in the tech space.

Layoffs ensued and tech declined about 30% last year.

It was even worse in the weird world of cryptocurrencies as seven of the most popular cryptocurrencies declined in value between 55% and 100%.

Those returns put a 20% general market downturn in perspective.

Candidly, diversification has been unrewarding during the last few years of easy money.

But 2022 was a great reminder of the benefit of diversification with "value" outperforming "growth" by more than 20%, which helped buoy our portfolios.

The idea behind diversification is that we are betting on the market as a whole rising over time and trying to ensure we don't lose our shirts during the process, which is critical to achieving our investment goals.

Lastly, there were a number of notable milestones in 2022 that, in my humble opinion, will drive investing results over the decades to come.

10.) EIGHT BILLION CONSUMERS

As of November, our global population crossed eight billion, and the road to get there has been incredible.

Consider this: In 1850, the world was home to 1.26 billion people, of which 1.1 billion lived in extreme poverty.

In the time since, our global population has grown to 8 billion while the total living in extreme poverty has dropped to 685 million!

Now, that's progress!

11.) FIVE BILLION INTERNET USERS

In the same year that our global population crossed eight billion, we also crossed the five billion mark for internet usage.

As people living in the developed world, we tend to view progress as stalling out, but nothing could be further from the truth.

We live in an increasingly digital world and what this data tells me is that there are three billion minds still to gain access to the rest of the world's knowledge.

I can't help but think that much more progress will come as those minds come online for the first time.

And the impact of this will be felt over decades. One more reason to maintain our long-term faith in the future.

12.) GLOBAL GDP CROSSED OVER $100 TRILLION

According to the IMF, global GDP officially crossed the $100 trillion mark in 2022.

While the markets bounce around quite a bit, the path to $100 trillion in GDP has been remarkably smooth.

If GDP is a representation of global consumption and our global middle class is expanding, what might this tell us about the likely direction of corporate revenues and earnings over the years to come?

13.) PROGRESS IN CLEAN ENERGY

One of the biggest news stories of the year—which was mostly a footnote in the mainstream media—was the breakthrough in nuclear fusion.

I can't sum up the potential of fusion better than Seth Godin and I think his words are a great way to close this review:

In Summary

Candidly, I know that last year was an exhausting investing experience.

We'll see if 2023 is the turning of the tide or if there is more bad news to come.

But as bad as the media makes it sound, there are many things to be positive about, as I hope I have shown.

While it's true that the future is riddled with uncertainty, believing that the momentum of human progress will continue is the historically accurate, fact-based worldview.

Be encouraged to let my optimism rub off on you. I wish you good health and much prosperity in the new year.

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Stay wealthy,

Taylor Schulte, CFP®