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BEST BEST
BEST of the BEST

ISSUE 39: DECEMBER 2022

FROM THE EDITOR
Welcome to our final edition of Best of It seems there’s a mean reversion going on here. Really poor years
the Best for 2022. Sentiment among are rarely followed by equally poor years. Indeed, we can say
investors has recovered slightly from the history suggests terrible years have been followed by extraordinarily
depressed state of June and more recently, good ones.
in late September. One can now describe And where are we today? So far, the performance of the S&P500
sentiment as ‘indifferent’. Interest in the stock in 2022 puts the year’s performance in the worst six per cent of all
market seems now to be found only among years since 1872. If history rhymes, next year or the year after could
professionals for whom it is their job to be be a very good one.
interested. Among direct investors, there’s
Christmas and the holidays to think about. And further good news might be coming from central bank balance
sheet data. Much of this year’s weakness can be linked to a
But it is during periods when sentiment is anything from depressed to tightening of liquidity through central bank Quantitative Tightening.
indifferent that seriously good long-term returns are established. Now
is the time to be constructing portfolios in anticipation of the better The most recent rally in equities however suggests more liquidity
times that inevitably follow the worst times. has been injected into markets. Indeed, that’s what the latest data
suggest. The U.S. Fed has effectively ceased Quantitative Tightening
And fewer periods have been worse for market returns than the last in Q4, even engaging in Quantitative Easing to the tune of US$167
twelve months. The zero-interest-rate epoch is indeed over, and that billion. This contradicts the hawkish rhetoric coming out of the central
realization along with four decade-high inflation and bond markets bank on rates, while suggesting the central bank has little appetite
pricing-in further rate rises have resulted in investors abandoning for a recession or catastrophic fall in markets.
equities, and particularly growth stocks.
History suggests return ‘mean revert’, meaning good years tend
But this could prove to be a mistake. Next year could be a very good to follow bad ones. Meanwhile, central bank data suggests they
one for investors.
are more mindful of the impact of their rate decisions than they are
My review of the distribution of annual returns for the S&P500, over letting on. Any softening in their stance is also positive for equities.
the last 150 years, revealed the two best return years were 1933 and If you are starting to feel greedy, it might just be the right response
1954, when the market rallied more than 50 per cent. Meanwhile, when others are so fearful.
the worst three years were 1931, when the market fell by more the 40
per cent and 1937 and 2008, when the market fell by between 30 As this is our last Best of the Best magazine for 2022, we wish you
and 40 per cent. There were also 31 years when the market rallied by and your family the peace and joy Christmas brings. And may you
between 10 and 20 per cent, 29 years when the market rallied less have a safe, healthy and prosperous 2023.
than 10 per cent and 26 years when the market rallied between 20 Roger Montgomery
and 30 per cent.
Perhaps more relevant to the topic of this Letter from the Editor, is
what happened after the worst years. Let’s look at the worst year for
equities – 1931, when the market fell by more than 40 per cent; the
following year the market fell again, but by less than ten per cent. The
year after that, however – 1933 – the market rose by more than 50
per cent. Founder and Chairman
Next, the year 2008 was one of the second-worst annual periods for
equities and it was followed by 2009, with returns of 20-30 per cent.
And 1937 was the other second-worst year for equity performance,
generating a return on the S&P500 of negative 30-40 per cent. It
was followed by 1938, which generated a return of +30-40 per cent.
BEST of the BEST
www.montinvest.com
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