Matt Somberg New Year Letter

February 13, 2023

February 10, 2023

Dear Friend,

I hope this letter finds you and your family well.

We have begun our 23rd year in practice and have taken time to reflect on 2022 and look ahead for 2023.  We thought it appropriate to send you some thoughts to offer perspective on a difficult year. As is customary, the second half of the letter brings you up to speed on the latest inside our firm.

A quick look back:

Of the twenty-three years we have been in practice, 2022 was one of the most challenging, perhaps second only to the 2008 Global Financial Crisis.  We subscribe to the philosophy that balance and diversification is the proper strategy for long term portfolios.  Yet, when an unusual phenomenon occurs of both stocks and bonds declining in the same calendar year, it makes for a challenging environment. Stocks and bonds declining in the same year is uncommon, occurring in only 3% of investment years. Calendar year 2022 was one of those years, and the first time since the 1960s.  To further the agony, stocks very quickly traded in the red and stayed there all year. The steady decline led to emotional fatigue for many investors (and perhaps a few advisors).

The major indices returned:

  • S&P 500 -18.1%
  • NASDAQ: -32.5%
  • MSCI ACWI Ex USA (International Stocks): -16%
  • Barclays Bond Agg -13.0%

For additional perspective, the industry standard for a ‘balanced’ portfolio is often one that is 60% stocks and 40% bonds.  In 2022, a balanced portfolio returned -15.6%, the worst performing year for this strategy since 2008.
 

 

 

 

 

 

 

 

 

 

 

 

Source: Morningstar. A balanced portfolio consists of 40% S&P 500, 20% MSCI ACWI ex US NR, and 40% Bloomberg US Agg TR USD.  For illustrative purposes only.  All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
 

Why such a downward spiral in 2022?

During 2020, as Covid impacted all our lives, the Federal Government injected cash into our economy and the Federal Reserve lowered interest rates to help stimulate the economy. In 2022, the Federal Reserve worked to reverse those policies by raising interest rates in an effort to slow down what began to be an overheating economy showing signs of higher inflation. The Fed raised interest rates an unprecedented 7 times in 2022, at the fastest pace in history. The speed at which the Fed acted had a direct correlation to the pace at which markets corrected.

 

Fed Funds Rate Increases in 2022 versus Past Rate Hikes Cycles

 

Source: AllianceBernstein

Will 2023 be a better year?

As we begin 2023, valuations for stocks and bonds certainly look more attractive than they did twelve months ago. The S&P 500 has a forward price-to-earnings ratio of approxiamtely 17x as compared to a  year ago when it was 21x. The year ended with the Fed Funds rate (pictured above) at a level over 4% for the first time since 2007. The result is a higher risk free rate, which directly affects investments such as money markets, CDs and bonds. Currently, many of these investments are generating income well above the 4% mark, making a return on lower risk investments more achievable and meaningful as we look ahead to 2023 and beyond. While it is likely that Fed policy will slow the U.S. economy over the next few quarters (the consensus view), the question that lingers is if their policies will send us into a recession. While we acknowlege that a recession is possible, it does not mean it is a forgone conclusion, or that markets cannot yield positive results in this enviornment. Many variables factor into stock and bond performance—not just economic growth. If anything, we would expect more normalcy in 2023 in terms of a how a balanced portfolio would perform. It is quite rare to see back-to back yearly declines in the S&P 500.  It has happened just twice since the end of World War II – in 1973-74 and for three years from 2000 through 2002.

Some of our most challenging work is to keep investors from making emotional or irrational investment decisions during challenging times in the market.  While each market cycle is different, we have experienced over and over the pattern of markets moving higher, an eventual leveling off and then a pull back – before moving higher again.  We are confident that 2022 was part of the pull back that will pave the way for markets to move higher again. There never has been, nor will there ever be, a time where everything is perfect and no risks exist. We see improved valuations from a year ago, and a resilient underlying economy providing cautious optimism about the markets for the year ahead. We are confident in our process and continue to stick to the investment principles that have yielded success over decades - balance and diversification.

Around the Office:

We have been working from our new building in Glastonbury for the last 18 months.  We are enjoying our new space and if you have not yet paid us a visit in person, please do.  We have taken additional steps towards our goal of providing various financial solutions within our building by leasing space to a local law firm as well as a mortgage lender. We are also welcoming a new next-door neighbor this month, as Trader Joe’s supermarket opens adjacent to our property.

It has been exciting and rewarding over the last twenty-three years to see our firm grow.  Growth can be measured in a number of different ways.  Certainly, number of employees (28) and total client assets under management ($1.6 Billion) * come to mind. But some of our most important achievements are our impact in our local community and the recognition of our work by our clients and peers.

In the Community 2022:

  • The firm continued our partnership with CT Foodshare to provide food to those in need.  

We also continued our partnership with House of Bread, a Hartford food shelter.

  • We organized a donation clothing drive for Save-a-Suit to support U.S. Military Veterans.
  • I continued my volunteer work with Connecticut Children’s Medical Center where I serve on the Foundation Board and Chair the Hospital Investment Committee.  I coordinated a small gathering of friends for golf in October that raised over $100,000 in one day for the hospital.
  • I was asked by Barron’s to present and speak at three of their national conferences in 2022.

Our work in the community is incredibly fulfilling.  The recognition that our Advisors and I receive from our peers continues to motivate us to do the best job we can for our clients.

Yet, our greatest appreciation is of you, our clients.  We are grateful for the continued trust that you place in us. We value it all the time and do not take it for granted.  While 2022 was a difficult year, it is now behind us, and has paved the way for new opportunities ahead. Thank you for staying the course.  We look forward to a better year in 2023 and hope to see you soon.

 

Sincerely,

Matthew Somberg, AIF®
Co-Founder & Partner
Accredited Investment Fiduciary ®

2022 Barron’s Top 100 Independent Advisors, created by Barron's. Presented in September 2022 based on data gathered from June 2021 to June 2022.  514 advisors were considered, 100 Advisors were recognized. Advisors pay a fee to hold out marketing materials. Not indicative of advisor’s future performance. Your experience may vary. For most recent award information, https://www.barrons.com/advisor/report/top-financial-advisors/independent

*Assets under management as of 2/1/23