Since the Great Depression in 1926, we haven’t seen such awful returns for balanced investors. 12 month returns this year, for people who are 100% in stocks, were actually better than those who are 50/50, 60/40. The bonds are the problem.
Diversified portfolios have had a stunningly difficult year. Stocks didn’t have a great year, but bonds really failed to cushion the blow. We’re very fortunate with our portfolios that we reduced the duration, the weighted average maturity of the bond portfolios, so our clients haven’t suffered anything like the average for a 60/40 investor.
But despite that, it’s been a bad year, and we know why: the era of cheap money is over. It’s been going on for over a decade. Alan Greenspan, Ben Bernanke, all of these people, if ever the market turned down, print a little more money. Interest rates were low; we could get away with it. Cheap money’s over, and it’s not just because of inflation, or maybe I should say it’s more than just inflation, because all of these things affect inflation. The supply chain is slightly broken. I’m not going to say it’s completely broken, but it’s gummed up. We’re seeing de-globalization.
On the product side, it’s pretty severe; on the service side, not so much, and we’re seeing significant labor shocks with no attempt or intent, apparently, to reform the immigration system, and yet, despite all this bleak news, there’s a kernel of good news that’s buried in the sea of red. For the first time in years, bond yields are finally rising to more rational levels. I mean, let’s face it, for the last decade or so, conservative investors have not been rewarded for being conservative. Their yields have been sorry.
In addition, now that we’re getting real yields on debt, zombie companies and zombie governments will have to pay for their choices in real interest rate dollars. Asset bubbles are deflating at a moderate rate. Yes, the stock market hasn’t been great, and yes, real estate has had some of the air taken out of it, but certainly it’s been manageable, not an asset bubble crash. As we see yields rise, and assets are re-priced, the outlook for a more traditional investment horizon and more traditional investment outcomes is actually looking quite likely.
Our expected returns going forward, as a result of the environment we’re coming out of, are some of the best that we’ve seen in, again, more than a decade. Now, this is interesting, because we’ve had a fake recession this year. Next year, likely, we’ll have a real recession. I always like to remind people the difference between the definition of a recession and a depression. A recession is when your neighbor loses that job; a depression is when you lose yours. For most of our investors, the worst-case scenario is a mild recession. We expect the more normalized environment of 2023, despite a recession, to be great news for long-term investors, and frankly, it’s about time after the last two to three years.