Nobody has the ability to accurately forecast the future of investment markets, so we are not going to try with our 2023 market perspectives letter. Instead, we are going to highlight where the investment markets are relative to recent history and what those positions suggest about their relative attractiveness going forward.

As bad as 2022 was for both stocks and bonds — it was the worst year we have experienced for the combined categories in several decades — the broad selloff positions both markets more attractively than they have been in years.
Consider these facts about current conditions and the opportunities they present:

1. Cash and money market investments that had returned almost nothing for the past three years are now generating returns of 3% to 5%. This is due to the government raising short-term interest rates in an attempt to reduce inflation.
2. Bonds that have offered lower income for years have also seen their yields rise recently. Interest rates paid on bonds are now two to three times higher than they were just two years ago. When bonds are purchased at high interest rates, and their rates decline over time as we expect they will as inflation subsides, bond owners receive higher prices for the bonds they own. In summary, bonds are better positioned than they have been in a decade to generate higher current income and greater potential for capital gains if rates decline from their current levels.
3. Stocks that became expensive during the pandemic have gone on sale. To mitigate the high volatility and company risk of investing in individual stocks, we favor investing in funds that own diversified groups of stocks. In evaluating the changing valuations of these groups of stocks, we are pleased to see price levels to start 2023 are 20% to 30% lower than they have been over the past three years. Most stock valuations are back to their long-term historical averages, which makes them the most attractive that they have been for many years.

As a final note on our investment strategy, we wanted to share good news about the Ironclad Fund. As a firm, we have been investing client funds in Ironclad as one of our complementary strategies for over a decade. We are proud to announce the fund completed 2022 with a positive return. In fact, the fund has never had a negative calendar year while generating an average annual return over the past decade of 5% after fees. The current market environment should allow Ironclad to continue its streak in 2023.

In summary, cash, bonds, and stocks are all poised to deliver better performance in 2023 than they did in 2022. Many forces will impact how those returns are delivered, but we begin this year with more optimism than we have had in prior years.