Some years are momentous; some are quite forgettable. 2022 was above average.
Certainly not in terms of stock market returns, but if one measured how much our economic lives changed, 2022 was above average. Let us count the ways.
Russia invaded Ukraine, an act that changed the world but surprised few who study the region. A conflict between Russia, whose GDP is half of California’s, and Ukraine, whose GDP is one-tenth that of Russia’s, shouldn’t matter all that much. But it does, because these two economies happen to be very concentrated. Russia produced 15% of the world’s oil, and 40% of the EU’s natural gas needs. Ukraine, despite its size, is a major source of seed oils, wheat, and 50% of the world’s neon – a critical gas used in semiconductors. It’s no wonder that the war quickly stoked inflation around the world.
After decades of staying tame, inflation reared its ugly head. As someone who has worked at a pricing desk at a Fortune 50 company, let me tell you, companies across the world spent 2022 frantically learning how to sustainably keep prices ahead of costs. A long thirty-year trend of low and declining inflation was now broken. While it has come off its June high, we are not out of the woods yet.

In response to the war and inflation, the US Fed raised interest rates. As a result, the average mortgage rate went from a ridiculously low 2.6% to over 6% today. This has had the predictable impact of crimping the housing market and is widely expected to put the economy in a recession in 2023, one that may well be needed to fully quell inflation.
But I don’t believe this will be like recent recessions. The labor market has been stubbornly robust. Just today, we got the unexpected news that January saw 517K new jobs - almost twice as high as expected.
Having enjoyed a nice January, the broad stock market is only down about 10% from its high. Today’s valuations are healthier than a year ago, but remain overly optimistic. My favorite measure – the Schiller CAPE10 Ratio is still higher than all but one episode in 150 years (the Tech Bubble). Two things could happen, either company earnings will slowly grow to deserve their stock prices today; or we will see a sharp decline in prices, before we set off on a new bull market. As of Feb 2, I think the chances of the second outcome are higher than the first.
The bond market, on the other hand, is now on a relatively healthier footing, with interest rates now compensating investors for taking on the risk of holding bonds. This is unlike the past decade when the Fed kept rates very very low.

Forecasting is a risky pastime, but the start of a new year begs us to take that risk, even if with a pinch of salt. Here it comes… I believe several factors have led to a dramatic shrinking of the US labor pool. Covid-19 fatalities, long-Covid, a sharp fall in legal and illegal immigration, and a jump in retirements have all led the US Labor pool shrink by 2-3m workers. The economy is still digesting this supply shock and will likely continue to for many years. This will keep unemployment low. That’s good news. But that will leave inflation elevated for some time. Which means the Fed will hold rates above 4% for several years. That, in turn, means that a lot of companies will feel the real pinch of higher interest rates and their earnings will shrink. That will put very serious downward pressure on the stock market with a non-trivial risk of some sector facing financial breakdown. However, at this point, I don’t see wide-spread contagion across the entire economy. This will mean that 2023, just like last year will feel volatile and on-edge with a good chance of a serious stock price decline. There. That’s my forecast for the year. Let’s see how it holds up. While 2023 could give us a scare, it is important that we remain focused on our plans and strategy. Our psychology is likely to react intensely and inappropriately to the coming swings. We will likely be the most scared when the market is down a lot, and cocksure if prices rise a lot. The very best investors avoid these traps. A well-devised financial plan has matched your investments to your needs and is diversified enough to weather this year. Continue to review yours and make adjustments, but more than anything, remain invested for the long haul. Our time is better spent adding value to our families, our careers, and our lives. Finally, I want to share with you a bit of what I have been reading and practicing. Personally speaking, 2022 brought a lot of change, and stress. Chrisette and I completed our new home and moved in, we bought a new building for Chrisette’s business to expand into and I got to start this new venture. In a self-help-y mood, I listened to “How to be a Stoic”, but Massimo Pigliucci.
I highly recommend the book. Not only did I find the basic tenets of Stoicism immediately comforting and useful, but they also translate well to investing and managing finances. For example:
Nature is rational. So is the market. While its day-to-day quirks may seem irrational, its behavior over time reverts to the reasonable.
In life, we must devote ourselves to study nature’s laws and live in harmony with them. So too should we study the market’s nature and invest accordingly, rather than seek to beat it or escape it.
Zeno warned that “nothing is more hostile to a firm grasp on knowledge than self-deception – the ego is the enemy”. There’s no greater teacher on this topic than the financial market.
The Stoic exercise of “Premeditatio Malorum” or “the premeditation of evils”, helps us anticipate how things could go wrong, prepare for inevitable setbacks and develop resilience.
And finally, the Stoic reminder, “Memento Mori” or “remember you are mortal”. Seneca wrote, “… Let us postpone nothing. Let us balance life’s books each day. . . .the one who puts the finishing touches on their life each day is never short of time.”
Let me know how you see things. Wish you a prosperous 2023!
This material is intended to be of general interest, not personal financial advice or a recommendation to buy, sell or hold any security or adopt a particular investment strategy. Your circumstances and attitudes toward risk matter, and only an advisor working with you can give you specific advice. All investments carry the risk of loss, including loss of principal. Stock and bond prices can be volatile. Past performance is not an indicator or guarantee of future results. Diversification does not guarantee profit or protect against risk of loss. This material may not be reproduced, distributed or published without prior written permission from Sanjay Pamurthy/Artham Advisors LLC. Data from third party sources quoted here has not independently verified, validated or audited. Although information has been obtained from sources that Artham believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Artham accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
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