As Lenin said, “there are decades where nothing happens; and there are weeks where decades happen”.
To say that 2022 was a watershed year would be an understatement. After more than a decade of keeping interest rates low, the Fed finally turned hawkish and hiked interest rate in the most aggressive way possible at the start of 2022. The markets turned upside down precipitously, putting the bull market to an end.
Before we put this forgettable year behind us, let’s take stock of the major events that happened in 2022 and how they have created a new normal for investors in the coming years.
(I will be sharing how this new normal would change the way we invest at FSM Invest Expo in person. Register for free here!)
Trigger event: Inflation finally caught up with us
The Fed has carried out 4 Quantitative Easings (QEs) since 2008 – in layman terms, they have been printing money and injecting liquidity into the markets.
This was one of the reasons that gave rise to one of the strongest bull runs in the US stock market. Between 2009 and 2021, the S&P 500 gained an average of 15.92% per year. This is way above the average of sub-10% gain per year if we look at a century of returns for the S&P 500.
The Fed was able to keep printing money because inflation wasn’t a threat. With interest rate at all time low, investors had to look for alternatives to grow their wealth. Liquidity was in abundance. It was easy for money-losing cash-sucking start-ups to raise money. Crypto absorbed part of the liquidity too. It was a time where more risk was rewarded with higher returns. Times were good.
Then Covid struck in 2020 and the world stopped in its tracks. Lockdowns and restrictions were imposed – we experienced one of the worst pandemic in recent times. No one knew what to expect. The Fed conducted the largest QE operation to save the markets and its assets ballooned to over $6 trillion (it was about $1 trillion prior to QE1).
The markets rallied again and we saw ARK Innovation ETF (comprises of high growth money-losing stocks) gained more than 100% in 2020. Bitcoin did even better, up 300%.
All was good until inflation started to spike in the middle of 2021.
The Fed initially dismissed the threat of inflation by saying that it was transitory due to Covid induced supply chain issue. They believed that inflation would eventually go away.
Only that it didn’t.
Rate hikes and rising yields
It was not until 17 March 2022 that the Fed raised the interest rate by 0.25%. It was close to zero before that while inflation has been rising for more than six months.
The Fed realised they were too slow and decided to turn into hawkish mode with steroids, rolling out the steepest rate hike in recent history.
Warren Buffett said, “interest rates are like gravity in valuations. If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that’s a huge gravitational pull on values.”
Gravity it was. The stock market tanked as the Fed hiked the rates.
Growth stocks suffered as their value were worth less after discounting at higher rates. Loss-making stocks fared worse as funding dried up and growth-at-all-cost is no longer a strategy while striving for profitability is key.
Not only were higher risk stocks impacted, relatively safer bonds were also not spared. This is because bond prices are inversely related to interest rates – bond prices plunged as interest rates went up. Bonds experienced one of their worst performances in history.
Investors in higher risk stocks may be prepared for the volatility but bond investors might not. It is unimaginable for a retiree planning to liquidate his bond portfolio this year. He would have wondered if he would still have enough money to last through his retirement. This is no laughing matter. That is the extent of the Fed policy’s impact.
On the flipside, rising bond yields have created opportunities for investors who are yield seekers. They no longer need to take so much risks to get decent yields. US government bonds are yielding above 4%. Ditto for Singapore treasury bills.
Banks have also raised the yields on fixed deposits and savings accounts alike.
With safe assets yielding at 3-4%, more investors would find it pointless to buy dividend stocks or REITs at 5% yield. The investment choices changed dramatically.
China’s enigma
Now let’s move to China. The world couldn’t comprehend its policies.
Why did the government want to kill its own tech enterprises with its draconian regulatory clampdowns?
Why did the government introduce so many property cooling measures and triggered a property market meltdown, threatening the entire economy?
Why did China adhere to the zero Covid policy for so long when the rest of the world has opened up?
Is Xi going to abuse his powers after getting his third term and ousting all opposing factions from the all-powerful Politburo Standing Committee?
And all of a sudden the policy direction took a 180 degree turn. Tech regulations seemed to be coming to an end. Property measures were lifted. China is slowly reopening and is forgoing lockdowns. What’s going on?
The world doesn’t understand China. Definitely not the West due to value and cultural differences. There were always more questions than answers.
China stocks took a beating with this enigma clouding the perception of China. The MSCI China Index hit a 10-year low in 2022. Even the most patient investor would have found it hard to stay invested in China stocks.
At the same time China is important to the rest of the world. It has achieved the superpower status. It can no longer be ignored.
Superpowers: two is a crowd
With China’s power rising, the US found itself in a very uncomfortable place. After ‘defeating’ the Soviet Union and Japan, the US has been the sole superpower for decades. Now there is a new kid on the block to share the power.
The US definitely does not want China to strengthen further. Hence, there have been a suite of policies imposed on China. The most impactful would be the semiconductor ban.
Semiconductor is the basic building block of technology and without access to the most sophisticated equipment and manufacturing technology, China is heavily impaired. Its semiconductor manufacturing capability is many years behind ASML and TSMC. It is still unknown if China is able to catch up.
What is certain is that the US would not let China off so easily and we can expect more geopolitical tension in years to come.
How would you invest as the world turns bipolar, less globalized and more protectionism?
FSM Invest Expo 2023
If what I have shared has intrigued you, be sure to come to the FSM Invest Expo 2023 where I will be sharing why investing isn’t going to be the same as before and more importantly, how you can position your investments in 2023.
But don’t just hear from me. Hear from the line-up of finance professionals giving their views and expertise on various investment opportunities. Fixed income would be a topic of interest considering that yields have risen recently and the event has dedicated many sessions to it.
It is going to be a hybrid in-person and online investment event happening on 7 Jan 2023. This is the first time after Covid that FSM is holding a physical event. It is time to meet fellow investors and get immersed in a physical event after so long.
More importantly, get inspired and make a more informed decision on how to invest in the new year. It is free and you can even win a prize! Register here now!
