Looking Back On A Volatile Year — And Looking Ahead To 2023…

Well friends, it’s almost time to close the books on another year.

Few investors will look back fondly on 2022. As of mid-December, The S&P 500 is on track to close with a decline of roughly 20%.

As things go, that’s not terrible. But the tech-heavy Nasdaq has fallen twice as hard, retreating 33%. And hundreds of stocks across the market cap spectrum have lost at least half their value during this selloff.

No Safe Havens…

Ordinarily, investors can flee to bonds during such downturns. When one group zigs, the other tends to zag. But not this time. Every major fixed-income asset class has been pummeled, regardless of credit quality. Investment-grade corporate bonds haven’t taken a beating like this since the Great Depression. And long-term U.S. Treasuries, widely regarded for their stability, have been no better than the Nasdaq, tumbling 24%.

So much for being a safe refuge.

Instead of helping soothe bear market pains, bonds have rubbed salt in open wounds. In historical terms, they have been punished far more severely than stocks. The New York Times cites one study suggesting this could be the toughest year for diversified bond investors since record-keeping first began in 1794.

Other sources say 1926 or 1949. Either way, this rout has been one for the ages.

So that old 60/40 rule-of-thumb preached by financial advisors (deposit 60% of your assets in stocks for capital appreciation and the other 40% in bonds for income and preservation) hasn’t been a winning strategy this year. According to Bank of America, this balanced mix is on pace to deliver the worst returns in a century.

Hence, a lot of wrecked 401(k)s.

But if you’re a High-Yield Investing subscriber, then you probably came out ahead of the crowd. As I’ve discussed previously, dividend-paying value stocks have provided some buoyancy in these choppy seas. Healthy balance sheets and visible cash flows are finally back in vogue. The iShares Russell 1000 Value ETF (NYSE: IWD) has slipped just 9% year to date. That’s less than half the decline of the broader market. But there’s an old saying in this business – you can’t eat relative returns.

Fortunately, we’ve managed to buck the trend. As I write this, the portfolio is sitting on a mild loss of 2% this year. Obviously, in an ideal world, we’d move the needle in a positive direction every year. But in this brutal market (one of the worst in the annals of history), I’ll take it. With a few days left on the calendar as I write this, we may end up in positive territory.

But consider this… As of now, we are on track to outrun the benchmark Russell 1000 value by nearly 600 basis points and the S&P 500 by almost 1,700. And we’ve had plenty of winners along the way…

I Saw This Coming…

I don’t think we need to re-hash the macro factors that beat down the market this year. If you’ve been a subscriber for more than a few weeks, then you know I place a great deal of blame squarely at the feet of Jerome Powell and his Fed cohorts. They failed to recognize inflationary threats until they were as obvious as an asteroid on a direct collision course.

Let me repeat some commentary from the my first issue of the year (January 12, 2022).

Will it be three? Or four? Or dare I say it, possibly even five?

I’m talking about rate hikes this year. It’s a foregone conclusion that the central bank will soon start tightening rates and unwinding other monetary stimulus measures. The question is, how far will it go?

Well, that question has been answered. We saw seven rate hikes this year, including four straight three-quarter point upticks. This has been one of the most aggressive tightening cycles in decades. While the prospect of higher borrowing costs has led to a great re-set in equity valuations, this salvo of monetary shots has been particularly damaging to bonds and other rate-sensitive instruments.

Source: Statista

Rate hikes are by no means unprecedented. But in previous rate tightening periods, capital losses were at least partially offset by coupon income. Bondholders didn’t have that luxury this time. We started with a Fed funds rate near zero, so bond yields were next to nothing and valuations were in bubble territory, making 2022 something of a perfect storm.

Fortunately, we were well prepared over at High-Yield Investing. I have been underweight bonds for some time — in fact, there are only two bond positions in the entire portfolio. One of those is a municipal bond fund, a nod to our more tax-conscious readers, and the other is a floating rate fund, custom-built to benefit from rising rates.

Looking Ahead To 2023…

I’ll save a discussion of some of our big winners (and some frank talk about our missteps) for another time. So stay tuned. We also bolstered our cash position by collecting dividends and interest. And on that note, we currently have a sizeable cash position in our model portfolio just itching to be deployed. And with short-term rates soaring, this money will be deployed into new holdings with much greater earnings capacity. Opportunities abound.

I expect to see a good chunk of that cash flowing into various fixed-income sectors, which are looking far more appealing now than they were this time last year. I expect our bond sleeve to double from less than 5% of portfolio assets to 10% in relatively short order.

But that can wait. Because my first pick for 2023 is currently throwing off a towering yield of 6.7%. And with cash flows expected to expand by 5% to 8% annually over the next three years, the payout is anything but fixed.

If you’d like to know more about our top picks over at High-Yield Investing, then you need to check out my this special report…

In it, you’ll find 5 “Bulletproof Buys” that have weathered every dip and crash over the last 20 years and STILL handed out massive gains. And each one of them carries high yields, with dividends that rise each and every year. Go here to check it out now.