No Room for Cosplay in Investing

Most years see some manner of substantial decline in stocks, even as most full-year tallies turn out positive. This year has proved an exception to that tendency. Thus far, at least—there’s still about a month to go. With stocks well off the trough for the year, but still far from their peak at the start of 2022, many are wondering what’s to come next. We’re not much for specific predictions, so readers will hear echoes of our broader investment approach in our thoughts for 2023: Macroeconomic volatility likely will remain elevated in 2023. Those forces in turn may promote instability in corporate earnings, so stock investors are likely to see price volatility remain heightened next year, too But stocks are naturally volatile. So more volatility should always be a core components of return expectations Per our normal stance, we expect longer-term stock returns to be positive, though perhaps not yet in 2023 But let’s not forget that the market generally gets ahead of turns in macroeconomic growth and corporate fortune. So folks concerned about the news flow of late may find focusing only on the present may crimp the potential gains a longer-term perspective may provide 202212 SAM CommentaryDownload Listen to this month's Notes from the CIO podcast: Not the Normal Outcome History shows that most years, U.S. stocks have seen positive returns. This year so far has bucked that norm. With only a month to go, seems quite possible we may not see the broader market turn positive by New Year’s Eve. Despite the nearly 14% rebound from October’s low, we’ve have heard more than a few folks suggesting the worst hasn’t yet been seen from this latest equity drawdown. That recession is nigh and stocks will plunge in sympathy at some point next year. Such pessimism seems always the easier note to strike when the market’s down and the rebound seems set upon a shaky foundation. But honest folks will admit they have no idea how next year’s market will perform and that whatever specific forecast they are offering must sit within a range of outcomes that include both better and worse scenarios. Of course, a wide range of potential outcomes is par for the course of equity returns, as our next chart demonstrates. Wide Range of “Yearly” Returns Looking at market returns only through the January-to-December lens masks the fact that stocks are pretty volatile over any 12-month period, including those that don’t begin in January. Starting from the beginning of 1926, there have been 1,152 12-month periods through the end of November 2022. The median return of the S&P 500 Index across those “rolling” periods was 13.2%. Well distant from