Reflection and Outlook: A Letter From the CEO

I’ve struggled to come up with the right word to describe the past year, and I keep landing on the now overused word: unprecedented.  2022 is the year of modern high inflation, drastic interest rate changes, and a war between two fairly developed nations.  As I look toward the horizon, I can’t help but think we’re at an inflection point.  A transition is underway in the world economy and capital markets as well as in the global political climate– all of which may impact our wealth. 

Since the 2008-2009 Great Recession, we’ve been in a stimulated economic boom fueled by near-zero borrowing costs and central bank balance sheet expansion. That trend came to an abrupt stop in 2022, as the Federal Reserve took an unprecedently strong stance against the worst inflation we have experienced in 40 years. Through seven rate hikes, the Federal Reserve dramatically increased the overnight target rate from 0-0.25% to 4.25-4.5%, a 1,700% increase in less than 12 months.  A pace that we have never experienced before, and will certainly leave some unintended consequences.

Why is this happening?

As I reflect on 2022, a few other noteworthy undercurrents have significant impacts on the markets:

• The Russo-Ukrainian conflict is an unforeseen and meaningful headwind causing massive disruption in energy and food supplies worldwide, causing prices to soar. This continues to be a challenge for the world’s central banks attempting to control the no-longer transitory inflation figures by tightening monetary policy.
• China’s zero-COVID policies disrupted global supply chains, expediting the repatriation of manufacturing outside of China to more regional locales in the rest of the world. While this repatriation effort will take considerable time and investment, deglobalization will likely continue in the near term considering the current geopolitical environment.
• The last noteworthy undercurrent is the digital asset marketplace or “cryptocurrency.” The headline collapse of FTX—fueled by a volatile cocktail of lack of regulation and due diligence, fraud, and naivete—led to billions of dollars lost in value for many digital asset owners. More than just a black eye on the industry, this collapse proved to be a contagion across many companies and assets in the space. The industry lost 63% of its market capitalization, shrinking from $2.2 trillion to $819 billion in 2022. 
  
  

Silver linings.

On the positive side, we’re seeing substantial interest paid on cash, money market, and short-term bonds after enduring a painful 2022 bond market, especially for long-dated bond investors. The labor market in the US remained extremely strong, with a steady 3.5%-3.7% unemployment rate from March through December. Just this month, we learned the bipartisan infrastructure bill will be passed into law, signaling our houses and parties of government gaining a willingness to work together on big, popular issues. Finally, the free world unified to support democracy behind an exceedingly brave and charismatic leader in Volodymyr Zelenskyy, earning him Time’s coveted Person of the Year award.

Outlook for 2023.

We are looking for 2023 to be a year of stabilization. We expect to see Federal Reserve policy stabilize later in the year as inflation falls from its 2022 peak of 9.1% toward levels more tolerable to the Federal Reserve. Economic growth will likely slow globally with meaningful differences between our domestic, European, and developing world economies. Lastly, we anticipate some volatility as we see the unintended consequences of rapid interest rate increases and quantitative tightening come to light, on top of the unknowns of geopolitical tensions that may bubble up unexpectedly.

Given that outlook, we believe this is the inflection point where correlations reduce, and we start seeing asset price movements more influenced by individual company results and prospects, less on the rising tide of increased money supply that buoyed the index returns of the past decade. Now we hearken back to our accounting roots and focus on fundamental investment principles: cash flow, market share, profitability, and revenues.

Our investment team continues to expand our non-traditional asset classes, which proved to be paramount in portfolios given last year’s market. As we increase focus and add more non-traditional investment options to our portfolios, we anticipate this asset class will continue to greatly benefit our portfolios. Additionally, tax and wealth planning teams are hard at work preparing for SECURE Act 2.0 and the other potential tax law changes that will affect our clients soon. 

Developing and growing our team.

Here at Sanderson, we focused on people in 2022. We’ve been ramping up the team with future leaders and training them to do things the right way—the Sanderson way. 

At our company holiday party, we were thrilled to announce the internal release of my dad’s new book, “Lessons Earned.” As you can imagine, collecting stories and insights from such a long, fruitful career was no small feat. Every Sanderson team member received a copy of the book, which will undoubtedly be an invaluable resource for our firm moving forward.

Our team also continued to grow. In 2022, we welcomed Joe Bartelo, Angelo Goodenough, Cameron Radziwon, and Eric Weiher—ensuring the Sanderson Way lives on for another generation of advisers and clients. 

Here to help.

Negative years in the markets are challenging. In 2022, those challenges were even more acute as we saw the rare occurrence of both stocks and bonds posting near 20% declines. Non-traditional assets of alternative trading strategies and private equity helped mute those negatives in the traditional capital markets. Additionally, an emphasis on short-term bonds and a style-neutral global stock allocation helped our portfolios avoid the worst of what the market offered last year. 

For 2023 and beyond, we are cautiously optimistic. Supply chains are freeing up, the labor market is cooling, and inflation has meaningfully reduced already, with future estimates coming close to alignment with central bank goals. This cycle won’t look like the last by any means; however, we welcome the focus of fundamental investments and know we will continue to provide great value to our clients. 

Thank you for trusting us with your wealth. Our team is working tirelessly to make sure we’re always helping make the best decisions we know.

Gratefully,

Justin Sanderson
CEO, Sanderson Wealth Management