High inflation, rising interest rates, and fears of recession all contributed to driving the stock market lower in 2022. With the exception of the Dow Average, all major indexes incurred double-digit losses for their worst showing in any year since 2008.
The S&P 500 lost 18.1% of its value, however, growth stocks were punished more severely. The Russell 1000 growth Index declined 20.4% while the Golden Eagle Aggressive Growth Fund Index (AGF Index) posted its worst showing in its 64-year history with a plunge of 52.8%.
While it can be distressing to endure a severe bear market, perspective can be gained by considering a long-term view. Discounting the brief 5-week swoon as the COVID pandemic began, the current bear market marked the end of the longest bull market on record, which saw the stock market accelerate at a rate never before seen in U.S. history due to technology and globalization fueling exponential economic expansion.
Following the financial crisis in 2008, and concurrent bear market which ended in 2009, the stock market moved steadily higher for 12 years and reached its all-time peak on January 3rd of last year. This run was briefly interrupted by the shock of the pandemic, leading to the shortest bear market in history. The 2020 bear market lasted just five weeks in which the S&P 500 Index declined 34% before hitting bottom on March 23. By August, the stock market had fully recovered and was trading at an all-time high.
However, the tide began to shift towards the end of 2021. As we have often stated, the stocks that go up the most often go down the most during corrections. Consider that the Golden Eagle Aggressive Growth Fund Index (“AGF Index”) had achieved a five-year annualized return of 31.7% whereas the S&P 500 had produced an 18.5% annualized return by the end of 2021*. The severe market downturn in 2022 sent both the AGF Index and S&P 500 Index into tailspins with the AGF Index spiraling down much faster.
By the end of 2022, the trailing five-year annualized return for the AGF Index was cut from 31.7% to 5.5%, well below its historic norm of 12.5%. By comparison, the five-year trailing return for the S&P 500 had been compressed from 18.5% to 9.4%, somewhat below its historic norm of 10.6%. On this basis, the AGF Index appears to be deeply undervalued, while the S&P 500 index looks to be moderately undervalued. In hindsight, there was one unforeseen factor that worked to the detriment of the stock market in 2022, the regression-to-the-mean phenomenon. History shows that periods of strong market returns are followed by periods of weak market returns. Hence, stocks tend to revert to their central tendencies when they become overvalued or undervalued. It can be questioned as to why no market forecast made the regression-to-the-mean observation one year ago. The Wall Street Journal reported that the median stock market prediction according to a survey of 12 pundits was that the S&P Index would close at 4,825 at the end of 2022 for a 2% gain. Not one single forecast came close to the final reading of 3,861 for the S&P 500 Index at year end.
Inflation is often cited as one principal reason behind the swoon in the stock market last year. Undeniably the Fed’s response to inflation has contributed to the market volatility, however history shows that inflation is not always bad for stocks. Let’s take a closer look at this observation. The Consumer Price Index (CPI) peaked last year at 9.1% in June, the highest rate in 40 years. The worst inflationary period in the US occurred in the late 1970s. The CPI accelerated from 7.5% in 1978 to 13.5% in 1980. During this two-year period of explosive inflation, the S&P returned 56% and the AGF Index nearly doubled with a return of 98%. During the worst secular inflation in history, $1 dollar invested in the S&P 500 would have grown to $89 in a tax deferred account. The CPI equivalent of $1 advanced to $6 during this period.
So, where does the stock market go from here? And where will investors make the most money? Let’s use history as a guide to address these questions. On average, our analysis shows bear markets have historically lasted 13 months. Looking at the AGF Index, the current bear market began 14 months ago while the S&P peaked 12 months ago (typically, aggressive growth stocks are leading indicators of the stock market, declining first and then recovering first). Looking back at the history of all 13 bear markets since 1947 further reveals that the longest bear markets lasted just over 20 months (excluding the 2000-2002 bear market which was a seminal moment for the United States as the country reeled from the unprecedented attacks on 9/11). As such, we believe we are entering the tail end of the current bear market. When considering aggressive growth stocks in particular, this style typically declines but then bounces off the bottom and reaches new highs much faster than the S&P. During the 2007-2009 bear market, the S&P 500 gave up 51% of its value and then rebounded 40% off the bottom one year later. Meanwhile, aggressive growth stocks declined 57% in this bear market, then rebounded with an advance of 87% one year later according to our AGF Index. During the brief bear market in 2020, the S&P 500 declined 34% while the AGF Index dropped 32%. Twelve months off the market bottom, the S&P 500 advanced 69% and the AGF Index, once again, led all investment styles with a gain of 147%.In closing, 2022 was the worst bear market on record for the aggressive growth style, however we continue to believe that the stage is set for a major market recovery in 2023 – and that aggressive growth stocks will again lead the way.
* The Aggressive Growth Index (“AGF Index”) consists of 12 publicly traded aggressive growth funds (ETFs and Mutual Funds) similar to the investment objective of Golden Eagle Strategies. Prior to 2005 the Weisenberger Mutual Fund Report was used. Growth is based upon the Russell 1000 Growth Fund (^RLG), Value is based upon the Russell 1000 Value Fund (^RLV) and the S&P is based upon the S&P Total Return Index.
High inflation, rising interest rates, and fears of recession all contributed to driving the stock market lower in 2022. With the exception of the Dow Average, all major indexes incurred double-digit losses for their worst showing in any year since 2008.
The S&P 500 lost 18.1% of its value, however, growth stocks were punished more severely. The Russell 1000 growth Index declined 20.4% while the Golden Eagle Aggressive Growth Fund Index (AGF Index) posted its worst showing in its 64-year history with a plunge of 52.8%.
While it can be distressing to endure a severe bear market, perspective can be gained by considering a long-term view. Discounting the brief 5-week swoon as the COVID pandemic began, the current bear market marked the end of the longest bull market on record, which saw the stock market accelerate at a rate never before seen in U.S. history due to technology and globalization fueling exponential economic expansion.
Following the financial crisis in 2008, and concurrent bear market which ended in 2009, the stock market moved steadily higher for 12 years and reached its all-time peak on January 3rd of last year. This run was briefly interrupted by the shock of the pandemic, leading to the shortest bear market in history. The 2020 bear market lasted just five weeks in which the S&P 500 Index declined 34% before hitting bottom on March 23. By August, the stock market had fully recovered and was trading at an all-time high.
However, the tide began to shift towards the end of 2021. As we have often stated, the stocks that go up the most often go down the most during corrections. Consider that the Golden Eagle Aggressive Growth Fund Index (“AGF Index”) had achieved a five-year annualized return of 31.7% whereas the S&P 500 had produced an 18.5% annualized return by the end of 2021*. The severe market downturn in 2022 sent both the AGF Index and S&P 500 Index into tailspins with the AGF Index spiraling down much faster.
By the end of 2022, the trailing five-year annualized return for the AGF Index was cut from 31.7% to 5.5%, well below its historic norm of 12.5%. By comparison, the five-year trailing return for the S&P 500 had been compressed from 18.5% to 9.4%, somewhat below its historic norm of 10.6%. On this basis, the AGF Index appears to be deeply undervalued, while the S&P 500 index looks to be moderately undervalued. In hindsight, there was one unforeseen factor that worked to the detriment of the stock market in 2022, the regression-to-the-mean phenomenon. History shows that periods of strong market returns are followed by periods of weak market returns. Hence, stocks tend to revert to their central tendencies when they become overvalued or undervalued. It can be questioned as to why no market forecast made the regression-to-the-mean observation one year ago. The Wall Street Journal reported that the median stock market prediction according to a survey of 12 pundits was that the S&P Index would close at 4,825 at the end of 2022 for a 2% gain. Not one single forecast came close to the final reading of 3,861 for the S&P 500 Index at year end.
Inflation is often cited as one principal reason behind the swoon in the stock market last year. Undeniably the Fed’s response to inflation has contributed to the market volatility, however history shows that inflation is not always bad for stocks. Let’s take a closer look at this observation. The Consumer Price Index (CPI) peaked last year at 9.1% in June, the highest rate in 40 years. The worst inflationary period in the US occurred in the late 1970s. The CPI accelerated from 7.5% in 1978 to 13.5% in 1980. During this two-year period of explosive inflation, the S&P returned 56% and the AGF Index nearly doubled with a return of 98%. During the worst secular inflation in history, $1 dollar invested in the S&P 500 would have grown to $89 in a tax deferred account. The CPI equivalent of $1 advanced to $6 during this period.
So, where does the stock market go from here? And where will investors make the most money? Let’s use history as a guide to address these questions. On average, our analysis shows bear markets have historically lasted 13 months. Looking at the AGF Index, the current bear market began 14 months ago while the S&P peaked 12 months ago (typically, aggressive growth stocks are leading indicators of the stock market, declining first and then recovering first). Looking back at the history of all 13 bear markets since 1947 further reveals that the longest bear markets lasted just over 20 months (excluding the 2000-2002 bear market which was a seminal moment for the United States as the country reeled from the unprecedented attacks on 9/11). As such, we believe we are entering the tail end of the current bear market. When considering aggressive growth stocks in particular, this style typically declines but then bounces off the bottom and reaches new highs much faster than the S&P. During the 2007-2009 bear market, the S&P 500 gave up 51% of its value and then rebounded 40% off the bottom one year later. Meanwhile, aggressive growth stocks declined 57% in this bear market, then rebounded with an advance of 87% one year later according to our AGF Index. During the brief bear market in 2020, the S&P 500 declined 34% while the AGF Index dropped 32%. Twelve months off the market bottom, the S&P 500 advanced 69% and the AGF Index, once again, led all investment styles with a gain of 147%.In closing, 2022 was the worst bear market on record for the aggressive growth style, however we continue to believe that the stage is set for a major market recovery in 2023 – and that aggressive growth stocks will again lead the way.
* The Aggressive Growth Index (“AGF Index”) consists of 12 publicly traded aggressive growth funds (ETFs and Mutual Funds) similar to the investment objective of Golden Eagle Strategies. Prior to 2005 the Weisenberger Mutual Fund Report was used. Growth is based upon the Russell 1000 Growth Fund (^RLG), Value is based upon the Russell 1000 Value Fund (^RLV) and the S&P is based upon the S&P Total Return Index.
Manager of the Golden Eagle Growth Strategy
