2022 was one for the history books: the highest inflation rate in four decades, the worst year for bonds on record, the sharpest drop for stocks since the 2007-2008 financial crisis, and the largest armed conflict in Europe since WWII.
December 2022 also marked 20 years since LongView was founded. During these two decades, we have weathered many historic challenges together. Clients who have been with LongView since the beginning, going back 22 years if we include our predecessor company, have withstood COVID 19, Brexit, the European Sovereign Debt Crisis, the bursting of the housing bubble, wars in Afghanistan and Iraq, and 9/11, as well as three recessions. Through all these ups and downs, we have strived to maintain a steady hand, preserving and growing our clients’ portfolios by adhering to fundamental investment principles and keeping our eye on your long-term goals, as our name suggests.
2022 in Review
For investors and consumers, the rapid run-up in inflation overshadowed everything else. Fueled by pandemic related supply disruptions and a contraction in the labor force, inflation hit 4.7% in late 2021 after a dozen years below 3%. Massive COVID relief packages sent trillions of dollars directly to consumers and businesses, boosting purchasing power while goods and services were becoming harder to procure. As a result, prices and wages climbed. The waning of the pandemic fueled an additional release of pent-up demand, and then in March of 2022 Russia invaded Ukraine, sending energy and food prices skyrocketing. Inflation doubled to over 9% by December 2022.
The Federal Reserve and other central banks responded with a show of force, reversing more than a decade of easy monetary policy. Interest rates rose at the fastest pace in over forty years and the cost of borrowing soared. In the space of nine months, mortgage rates doubled to over 6%, while credit card rates topped 19%. Global economic growth faltered as consumers and businesses cut spending.
Investors with no memory of the inflation of the 1970’s or of the draconian monetary policy that tamed it were taken by surprise. The bond market suffered its worst year ever, with 20-year Treasury Bonds down over 30%. Stock markets around the world plunged 20% or more. An October rebound still left the All Country World Index (ACWI) down 18.36% for the year. Oil, gas, and defense stocks were among the only winners, posing an additional challenge for socially responsible investors who tend to avoid these industries.
A political backlash against sustainable investing originating in oil producing states like Texas and Oklahoma and other conservative-led state legislatures was also a notable feature of 2022, as was regulatory focus on sustainable investing and “greenwashing” that led to Federal actions against several large financial institutions for providing misleading information about their use of ESG (environmental, social, and governance) strategies. While such pressures are likely to continue in the coming years, we believe that in the long term, sustainable investing will continue to gain in popularity as investors apprehend the urgency of the climate crisis. We also support greater regulatory oversight which will improve transparency and standards, thereby benefiting investors.
Though we could not escape the broad downtrends in financial markets, LongView’s portfolios outperformed their benchmarks due to defensive moves taken earlier on. The inclusion in our portfolios of hedged equity funds that use options to protect against downturns, value funds that invest in cheaper stocks, and international funds, all of which fell less than the overall US market, helped to bolster returns.
Our early concern about inflation led us to favor shorter maturity bond funds that are less vulnerable to rising interest rates than the overall fixed income market. Our investments in alternative strategies (low volatility funds designed to generate predictable returns), which we use as supplements to traditional bonds on the conservative side of portfolios, provided even more significant protection from bond market turmoil.
These returns were achieved while adhering to sustainable investment principles and increasing socially responsible funds as a percentage of our total holdings.
Prices of goods from lumber to natural gas are falling. Shipping costs have dropped, mortgage applications have dried up, rents are down, and housing prices are turning over. The first signs of a cooling labor market are evident and global industrial production is slowing.
It takes 6-12 months for monetary policy to be effective, and the effect of the Fed’s interest rate hikes that began last March is becoming apparent. We believe inflation peaked last year, and that 2023 will see a decline in prices, with the Fed eventually declaring victory and moving to lower rates.
Some nations like the UK are already in recession, but much of the world could experience a slowdown of more modest scope. The reopening of China after three years of “zero COVID” policies should also provide an offsetting boost to the global economy. The anticipated decline in corporate profit growth resulting from tighter financial conditions is already reflected in the price of many companies, and while further market weakness may lie ahead, 2023 could ultimately offer attractive opportunities in both stocks and bonds.
Though the outcome of the Ukraine war, the possibility of central bank overtightening, and the appearance of new COVID 19 variants remain unknown risk factors, we are growing more optimistic on the investment outlook as evidence of moderating inflation becomes more widespread.
LongView was thrilled to add two new team members in 2022: Ernestina Savage, who we introduced in our last quarterly letter, and Emily Estes, who joined as Associate Advisor in November.
Emily was born and raised in Santa Fe before earning her bachelor’s degree in Sociology and Gender Studies at New Mexico State University. After a decade in experiential education and conducting research for the US Department of Health and Human Services, Emily began her career in finance in 2020 in the insurance industry. She holds the FINRA Series 7, and NASAA Series 66 registrations, as well as a New Mexico Life and Health insurance license. As Associate Advisor, Emily will be assisting with financial planning and portfolio management.
Among other noteworthy events, LongView renewed its triennial B-Corp certification in 2022. David was quoted in the Morningstar Mutual Funds article “Why Sustainable Investing is Here to Stay,” and Sustainability Associate Leah Cantor contributed a featured article on women and the future of sustainable investing in Green Money Journal. LongView joined the US Sustainable Investing Forum and participated in public advocacy on the SEC Climate Disclosure Rule. We launched a new webinar series focused on women’s financial empowerment with expert Bridget Jones. Finally, our renovated office building won the 2022 Historic Preservation Award from the Historic Santa Fe Foundation.
Reflecting on twenty-plus years of serving our clients, perhaps the most significant development has been LongView’s evolution into a sustainable advisory practice, both in our investments and in the conduct of our business. Our mission is to help our clients achieve their financial goals through careful shepherding of their capital. To be able to do this while helping them align their investments with their values, and while earning our livelihood in a way that makes money a force for good, has been an added privilege and inspiration.
Thank you for keeping trust with us on this journey. We wish you peace, good health, and happiness,
The LongView Team