Perhaps the best thing that can be said of 2022 is that it is over. Equity markets saw the steepest losses since the 2008 financial crisis as the Federal Reserve responded to strong inflation with a record pace of tightening. Historically, 2022 was the 7th worst annual decline for the S&P 500 since 1926. It wasn’t much better for bonds, as 2022 was the worst year on record for the Barclay’s U.S. Aggregate Bond Index since it began over 45 years ago. However, it must be noted that in one of the worst years in decades for both equities and bonds, Cardinal Capital’s diversified value-oriented approach continued to work well, especially during this year’s market volatility.
Equities struggled in 2022, primarily due to higher rates compressing valuations and a weakening outlook for corporate earnings amid recessionary fears. Our focus on financial strength, profitability, growth, diversification, and valuation benefited our clients in 2022. We remain invested in high-quality companies (low debt levels, strong cash flow, high returns on capital) that are often more resilient to a slow growth environment. Constructing portfolios of high-quality companies diversified by industry, contributed to our strong outperformance relative to the indices during the year.
As typically happens, market turmoil creates investment opportunities. Over the year, Cardinal’s proprietary model and analytics, powered by FactSet’s extensive financial database, identified as many statistically cheap stocks as it did a decade ago during the financial crisis of 2008. As a result, we added a record number of new, attractively priced stocks to our equity portfolios. These new stocks met our criteria for profitability, financial strength, and growth potential at attractive valuations and contributed to better portfolio performance and diversification.
The overall market outlook may be improving. We may have reached an inflection point as inflation may have come down from its peak over the past few months. If this trend continues, the Fed may pause its rate-hiking campaign. If so, we expect volatility to subside and more promising investment returns as the year progresses. With such pervasive negative market sentiment, even a modest change in the Fed’s stance could lead to a favorable market move. Therefore, we continue to encourage investors to stay invested, diversify, and focus on quality and value.
For those clients seeking a more balanced asset allocation, we continue to utilize short-term, investment-grade corporate and municipal bonds. Shorter maturities allow us to take advantage of the currently higher yields offered by the inverted yield curve and re-invest those proceeds upon maturity amid the evolving interest rate environment.
We appreciate your business and the trust you have placed in us and are dedicated to serving you in the year ahead. As always, we remain confident that an ever-changing world will provide ample market opportunities to continue to employ our investment strategy. Please give us a call with questions about your investments or your portfolio. All the best wishes for a healthy and prosperous New Year.
