As we reflect on 2022, we quickly realize the year brought many significant surprises. Russia launched a full-scale war against Ukraine in late February, contributing to continued pressure on inflation through most of the year; the Federal Reserve increased interest rates by 425 basis points, the fastest pace in over 40 years; the stock market significantly repriced its valuations, which peaked on the first trading day of 2022; and rolling lockdowns continued across several Asian countries, with China (the last holdout) finally lifting its zero-Covid policy in December.
After all this, we can gladly say good riddance to 2022! As for 2023, prognostication generally proves to be as much of a fool’s errand as trying to time the markets, so while I will dig into some of the themes we are monitoring in 2023, I will also spend time describing our investment philosophy and why we focus on a sound, long-term investment strategy versus reacting to short-term economic and market anomalies.
In 2023, the first theme we’re watching is inflation. Inflation has started to moderate, but factors outside the Fed’s control (such as sticky inflation in wage growth) could cause inflation to remain elevated above the Fed’s 2% target rate. When it comes to lowering inflation, the Federal Reserve has blunt tools for use, whose impacts have “long and variable lags.” Having fallen woefully behind in initially addressing inflation, Chairman Powell and Fed members are not willing to risk inflation becoming a sustained, embedded problem by prematurely pivoting or easing off the rate increases. That being said, compared to early 2022, we believe most investors have more adequately priced in these next few rate increases.
Valuations and earnings expectations is the second major theme we’re watching this year. Throughout 2022, the S&P 500 forward P/E ratio repriced from being ~25% above historical norms at the start of the year to ~1% below the historical average at the end of December, mainly in response to Central Bank actions. There is potential for additional earnings revisions this year; and while market volatility is uncomfortable, lower valuations historically yield better long-term returns for investors.
At JGP, our investment philosophy is centered around our core goal and mantra: “Helping clients confidently live the life they want.” It’s not an exaggeration to say we live and breathe this mantra, especially when constructing our portfolios. We focus on creating a sound, long-term strategic allocation that will perform well over full economic and market cycles. This long-term view may then be complemented by shorter-term adjustments, as necessary. When analyzing companies for investment we look at everything from corporate governance and cash flow to debt structure and valuations. Having a disciplined approach to how we evaluate companies leads to consistency in implementation as well as in performance and risk metrics.
The other way our investment philosophy plays out is by sifting through market and economic headlines (which are frequent, and often short-term and narrow in focus) to suss out, what we interpret to be, structural changes within markets and economies that warrant attention. This may be something as protracted as aging demographics and its impact on local and global economies to something more attention-grabbing as the shift to green energy and a carbon-neutral economy. While these topics will likely interest different parties, they are both equally important and equally dynamic when it comes to considering long-term investments we want to make within our portfolios.
Our clients have worked hard to achieve financial success and often don’t like to (and don’t need to) invest in speculative markets or assets. Instead, we stick with a prudent investment approach that has enduring success. After all, investing is a marathon, not a sprint. By focusing on the long-term and not being susceptible to the day-to-day rhetoric, our methodology gives us full confidence that we can help you easily achieve your goals while providing peace of mind along the way.
2022 was an adjustment year where markets repositioned themselves to a higher inflationary regime, but we believe we are starting 2023 off on stronger footing. Even though there is still some uncertainty in the stock markets, fixed income is now potentially reasserting itself as a total return asset class and should return to its diversification status. Additionally, lower stock valuations could prove a strong catalyst for long-term investment returns. Finally, we are evaluating structural changes that are appearing, determining which warrant investment, and addressing the best ways to invest in those themes within our portfolios while maintaining our core investment philosophy.
Most importantly, all of us at JGP would like to thank you for your ongoing support of our firm. 2022 was another record-breaking year for referrals and new clients to the firm. In our business, referrals are the deepest form of confidence you can show, and that trust is not lost on us as you continue to refer your family and friends to us. Our growth also led to the addition of two extremely talented team members whose expertise will go far in helping us serve you better. As we refocus on 2023 and the new year, we remain steadfast in our two guarantees to you: we will always put your interests ahead of all others and we will passionately show up every day, to do our best, to help you confidently live the life you want.
Best wishes for the new year!
By Shannon Jones, CFA, CFP®
Senior Portfolio Manager
This commentary in this email reflects the personal opinions, viewpoints and analyses of the JGP Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by JGP Wealth Management, LLC or performance returns of any JGP Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. JGP Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities
involve the risk of loss. Past performance is no guarantee of future results. No advice may be rendered by JGP Wealth Management, LLC unless a client service agreement is in place. Please contact us at your earliest convenience with any questions regarding the content of this presentation and how it may be the right strategy for you. For actual results that are compared to an index, all material facts relevant to the comparison are disclosed herein and reflect the deduction of advisory fees, brokerage and other commissions and any other expenses paid by JGP Wealth Management, LLC's clients. An index is a hypothetical portfolio of securities representing a particular market or a segment of it used as indicator of the change in the securities market. Indexes are unmanaged, do not incur fees and expenses and cannot be invested in directly.