Dimensional’s Takes on the 5 Biggest Financial Topics of 2022
Every year, Dimensional produces a range of resources and analysis to help financial professionals like me and investors like you make smart, informed decisions.
In 2022, they conducted research and shared perspectives directly connected to happenings around the world, from navigating geopolitical events and the impact of the US midterm elections to evolving issues such as soaring inflation and the volatility of tech giants.
Here is a look at five of the industry’s hottest topics this year and what Dimensional had to say.
Market volatility
It was a tough year in the markets, leaving some investors feeling anxious when it came to their finances. Many found themselves contemplating what such market volatility means for their investment strategies.
In “Do Downturns Lead to Down Years?” Dimensional provided some optimism by showing that a broad US market index had positive returns in 17 of the past 20 calendar years, despite some notable dips in many of those years.
“There’s not a single year when the market was always positive. There will be times throughout any year when you see the market drop,” said Wes Crill, Head of Investment Strategists. “Most years still end up positive, and even though some do end up negative, we believe you are better off staying invested rather than panicking because of a drop.”
2. Stock performance in recessions
The potential for a recession captured the minds of financial professionals and investors alike in 2022 and continues to be a hot topic going into the new year.
Dimensional developed an interactive chart “Market Returns through a Century of Recessions” to emphasise the forward-looking nature of markets as it examined how stocks have behaved during US economic downturns. Ultimately, the piece shows that markets around the world have often rewarded investors even when economic activity has slowed.
The study also captures the uniqueness of recessions. “Each one looks different,” Crill said. “There is no cookie-cutter recession and no absolute signal of when to get in or when to get out of the market.”
3. The Fed’s impact
The US Federal Reserve’s series of rate increases reminded investors that markets tend to incorporate such actions in prices before they are officially announced.
On 10th June, days before the announcement of a rise in interest rates, the market had already priced it in. Interest rates jumped on 13th June, but the actual announcement did not come until two days later. On the day of the announcement, Treasury yields actually decreased.
4. Benefits of long-term investing
Investors without a solid plan (and professional guidance on how to stick with that plan) may have found themselves making some knee-jerk decisions about their money this year. It’s natural to worry about the effect of so much uncertainty on your long-term investments, but Dimensional Founder David Booth is quick to point out why long-term investing is crucial.
“Investing in markets is uncertain. The role of markets is to price in that uncertainty. There were a lot of negative surprises over the past 25 years, but there were a lot of positive ones as well. The net result was a stock market return that seems very reasonable, even generous,” Booth writes. “It’s a tribute to human ingenuity that when negative forces pop up, people and companies respond and mobilize to get things back on track.”
Investors without a solid plan may have found themselves making some knee-jerk decisions about their money this year.
5. Value bounces back
After more than a decade of underperforming growth stocks, value stocks bounced back over the past couple of years. While value's rebound rewarded investors who stayed in their seats, the rally led some to question how much longer its run can last.
“Just like data shows that bull markets often last longer than bear markets, and have higher peaks, value runs are much longer and reach higher peaks than the downturns,” Crill said. “But it is important for investors to balance their enthusiasm for higher expected returns with their tolerance for underperformance.”
Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return. That’s one of the most fundamental tenets of investing. Combined with lengthy historical data on the value premium, our research shows that value investing continues to be a reliable way for investors to increase expected returns.