By any standard, the past three years were historic. It reminded me of the tech bubble that burst from 2000 to 2003, with San Jose’s Silicon Valley as the epic center. You had to live there to truly understand the financial devastation as hundreds of thousands of people saw their company stocks implode, and many lost their jobs. Traffic went from congested to ghost towns almost overnight.
The stock market and real estate return somewhat offset all the challenges Americans experienced in 2020 and 2021. The worldwide pandemic prompted government leaders to enforce the longest sustained period in the history of societal restrictions on citizens that caused supply chain issues, business closures or working at reduced schedules, and most retailers either closing or understaffed. This period was a bit easier to endure as retirement and personal investment accounts, along with home prices, surprisingly soared in value. The major indices surged during these two years, with cumulative returns of the Dow Jones Industrial Average (DJIA) rising 27.33%, S&P 500 52.39%, and NASDAQ skyrocketing 74.36%.
Despite the amazing tech index rally, except for Meta (formerly Facebook), all of the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) turned in even better returns than the NASDAQ index, with Apple leading the group surging 141.9% for this two-year period.
The unusual price gains were not limited to just stocks and real estate. During the pandemic, trillions of US dollars were printed and distributed to nearly all living in America, which set up a tsunami wave of too much money chasing after too few goods. Discretionary items, including TVs, boats, cars, and houses, rocketed to ridiculous prices as people with cash to burn sought after these items. Entire inventories of campers and motor homes were quickly bought in 2020, increasing in price that continued in 2022. Panic buying of survival products from food to camping equipment was quickly bought while retailers’ inventories were diminishing due to manufacturer work restrictions.
Why the brief painful look of the pandemic years? One must put into historical perspective averages to understand the 2022 correction in the price of just about every asset class, excluding energy. Interest rates rose as the Federal Reserve bumped rates in six consecutive sessions in 2022, sending mortgage rates up over 300%. Let’s look at the impact on three key categories :
HOME PRICES: The US median house price in 1950 was $7354, and by 2020 the median house price increased to $336,900, according to World Population Review, for an annual compounded increase of 5.62%. By the end of 2022, the median house price ballooned to $428,700 for an annual compounded increase of 12.8% in two years or more than double the previous 70-year average.
US STOCK PRICES: The S&P 500, as mentioned earlier, increased 52.39% from 2020 to 2022, averaging over 26% per year. However, this annual return of the S&P 500 for these two years is over 300% higher than the 50-year 7.31% average annual return of the S&P index excluding dividends (historical data provided by Trades that Swing).
HOME FIXED MORTGAGE RATES: The national average 30-year fixed mortgage Annual Percentage Rate (APR) in 1970 was 7.31% and rose to 16.64% by 1981. Over the next 40 years, mortgage rates steadily declined to bottom at 3.15% in 2021. During 2022, mortgage APR rose to over 8% but eventually settled to end the year at 6.88%. For perspective, the 40-year national average APR of fixed-rate mortgages from 1970 to 2010 was 6.33% per Rocket Mortgage and slightly below current rates.
The pandemic caused tremendous price volatility as supply and demand fluctuated widely, raising prices well above historical averages. Obviously, stock prices and home values can’t sustain annual increases significantly above long-term historical averages. As a result, a correction was needed to bring prices and interest rates to levels that are sustainable and offset the above-average levels reached in previous years.
What Does This Mean to Me?
With the start of a new year are new hopes along with putting the past behind. Stock market corrections are never pleasant, as we experienced in 2022. However, there are many reasons for asset price corrections that are not all bad and can set up future positive trends. Certainly, if prices soar well above historical averages, it is necessary and as quickly as possible to have prices return to long-term average ranges. The longer price trends remain above the historical average, the longer they typically decline to achieve historical averages.
A favorable scenario is a correction that is primarily due to short-term market anomalies that prompt wide price volatility that, after the event, prices settle back to long-term averages. The pandemic and government reactions were certainly anomalous events impacting the economy and society. It's worth reminding that the pandemic occurred during a strong economy that appears to still be in tack three years later with high employment participation and corporate growth. For Q3 2022, S&P 500 revenue growth was projected to increase by 10.5%, and if so, it will be the seventh consecutive quarter of 10% or greater revenue growth. Earnings for the calendar year 2022 are projected to be 5.6% and close to projections made at the end of 2021.
Home prices in 2022 did peak in June have increased by 9.02% but still ended the year with a national average increase of 6.45% and above historical annual growth of 5.62%.
There may be more price reductions among certain asset classes in 2023, including housing and energy. However, the duration and impact of a correction may be minimized due to the continued growth of the economy. The S&P 500 declined 19% in 2022, while the average earnings of the companies in the index are projected to increase by 5.6%. Earnings are forecasted by many analysts to slow in 2023, which may keep investors on the sideline for a while. However, it is only a matter of time before stocks will become attractive as stock prices remain down while earnings and profits continue to be added to corporate financials, even at a slower pace.
Throughout last year we increased our cash positions in most of our client accounts and are being patient with new investments into the stock market. We maintain our favorable view of the US economy and stock market. We believe a new market uptrend will develop in 2023, barring any new economic impacting anomalies.
Call or email us if you have any questions or comments about this Brief. We welcome the opportunity to connect with you.