Dear Clients and Friends of Insight,
It seems almost everyone is pleased to see 2022 come to a close. The year brought many challenges and disappointments to the world. Investors of all stripes suffered losses from global bear markets. Our 2022 letters chronicled the breadth and magnitude of these losses, ranging from popular growth stocks which fell over 30%, to esoteric investments such as crypto-currencies and non-fungible tokens which saw their values collapse. Even the bond market experienced double-digit declines. With the loss of literally trillions and trillions of dollars across the global stock, bond and real estate markets, we think for conservative investors the worst of these losses are now behind us.
Focusing on stocks, the S&P 500 Index lost 18%, though the returns varied greatly across stocks and sectors. Thus, some investors performed much worse than the Index, while some investors performed considerably better than the Index. Insight’s clients performed considerably better!
It is instructive to evaluate this performance by the various components that determine stock prices. These include revenue, profit margins, earnings and valuation, or the P/E level. Let us take a look at these components for the S&P 500 for 2022. Revenues actually grew by 9%, while profit margins declined 14%, though they are still very healthy. This led to earnings contracting by 4%, a reasonable achievement given the perceived imminent recession. Thus, what impacted stock prices the most was the change in the P/E level investors are now willing to pay. This level declined from over 21x to start the year, and now sits at around 16x expected earnings for the year ahead.
The best performing companies within the S&P 500 were well-established, financially strong and highly profitable businesses. And, many of them pay their shareholders with healthy dividends and share buybacks, and have consistently raised their payouts to shareholders over the years. These are the characteristics of the companies we predominantly own in client portfolios – a chief reason for our strong outperformance.
Interestingly, and as an indication of the underlying strength of the U.S. economy, the companies in the S&P 500 paid out record sums in 2022. Dividends totaled $561 billion, a nearly 10% increase over 2021, while stock buybacks totaled $963 billion, up a similar percentage. We remain encouraged by these trends and believe client portfolios are positioned for positive results as the new year unfolds.
We wish you a happy and healthy 2023! We look forward to the rewarding opportunities ahead. Thank you for your continued trust in our services, and with the relationship we have with you.