My stock portfolio got crushed in 2022. Here's why

My eToro portfolio took a big hit of -36% in 2022. Could have been worse if it was not for my short position on the SPY and some Gold holdings.

Cause

Inflation rates not seen since the late 1970s and early 1980s. The FED working to clean up the mess caused by easy money policies for too long. FED is in a campaign to throttle inflation by boosting borrowing costs.

And effect

Future cash flow is less valuable in a high interest-rate world. It costs more to borrow to fund growth. The bigger the growth rate, the harder/costlier it gets. Investors got it, and the Market shifted from growth stocks to value stocks. My eToro portfolio is 70%+ invested in growth-kinda stocks. Just check at how VTV outperformed VUG over the 3-months, 1-year and 3-years windows.

The question is: is the shift toward value and fixed income over or just starting?

Investing in 2023: opportunities and risks according to the experts

The optimistic team

BofA Global Research:

• Bullish on bonds in H1, stocks in H2.
• Forecast recession in H1.
• Past peak in interest rates, a trough in corporate profits by mid-2023.
• Balanced portfolio of 60% stocks and 40% bonds for positive return in 2023.
• Small-cap stocks are a great way to approach economic recovery.

Goldman Sachs:

• Markets often fall in anticipation of bad news but begin recovering even as the headlines remain ominous. Never has been a recession so much annunciated by economists (61% probability of recession according to 77 economists surveyed by the WSJ in Jan. 2023). Hence risk assets might deliver attractive returns if US recession is avoided.
• If a small recession happens, stocks could still deliver positive returns. There is a history of sizable rallies in the final months of past economic downturns.
• The slower pace of US dollar appreciation in 2023 could also help ease pressure on corporate revenues.
• Rising interest expense not a key concern this year, as most S&P 500 firms' debt is fixed over long durations.

J.P. Morgan:

• Challenging year for equity markets. Mild recession and contracting labor market predicted.
• Weaker demand and pricing power. Further margins compression. Less buy-backs. Hence lower earnings for companies.
• FED expected to change direction by year end. This should boost the S&P500 in the second half of the year.
• Focus on companies with lower debt and strong balance sheets to navigate the potential downturn.

Fidelity:

• Too much negativity in the market. Too late to be bearish, stay the course in equities.
• Focus on specific areas with historically low valuations. Valuation spreads—which measure the difference in valuation between the most-expensive and least-expensive stocks—looked historically wide at the end of 2022.

ARK Invest:

• 2022 market dislocation that crushed growth stocks presents an opportunity for innovation strategies to thrive when equity markets recover.
• Balance your portfolio with exposure to disruptive innovation. Hedge against the increasing risk of incumbents being disrupted.

The pessimistic team

Morgan Stanley:

• Unattractive valuations and lofty earnings expectations.
• No durable recovery in U.S. equities in the year ahead
• Focus on fixed income to wait for better opportunities further down the road.
• Opportunities to be found in Asia and Latin America stock markets. They are trading cheaply relative to their history and developed market equities.

GMO:

• Expects low returns for most asset classes in the coming years.
• Advises investors to focus on defensive strategies and avoid chasing high-growth sectors. Focus on "deep value" instead.
• Think longer term. An aging population means a lack of workers. Climate change and hot geopolitics mean more supply chain disruption. The lack of metals needed for decarbonization means soaring commodity prices. All of this will drag on growth and keep boosting inflation.

Blackrock:

• New regime of greater economic and market volatility is playing out and not going away.
• Expect inflation to cool but stay persistently higher than central bank targets of 2%.
• Focus on sectors, regions and sub-asset classes, rather than broad exposures.

The Economist:

• US stock market still expensive by historical standards relative to their underlying earnings.
• Growth and value stocks both vulnerable to earnings downgrades.
• End of the free money era. Governments need more private investors to hold their debt now and in the future. It will drive bond prices down and yields up, making stocks less attractive.
• Divergence of expectations between economists and investors. Earning downgrades still to materialize. Analysts´ consensus still forecasts earning growth of 4% in 2023, while 2/3 of economists forecast a 2023 recession.
• Divergence of expectations between the FED and investors. Markets expect the Fed's benchmark rate to hit a peak of below 5% in the first half of this year, before declining. The central bank's governors disagree. They project that the interest rate will peak at 6%.
• More pain ahead for investors in the stock market.

My game plan for 2023

Navigating the stock market in 2023 will be a challenging task. Experts have varying opinions on the opportunities and risks that lie ahead. Some experts are optimistic about the market and recommend a balanced portfolio of stocks and bonds for a positive return. Others advise investors to focus on fixed income and avoid chasing high-growth sectors, while most recommend focusing on specific areas with historically low valuations.

My key takeaway from this analysis is to be extra cautious on the short and long term. GMO makes good points about why long-term prospects do not look too good. Given I am investing to retire by 2030, it strikes a cord.

About 50% of my cashflow goes to real estate in Chile (paying the mortgage). 25% is going to a pension plan primarily invested in the global stock market. What´s left is what I can choose to invest with greater flexibility in my eToro portfolio or elsewhere. This 2023, I will definitely invest any extra savings in local fixed income, which currently yields very safe double digits (inflation in Chile is running at 13%).

I do have a significant amount invested in US equities through eToro. I won´t add to it in 2023, nor will I sell it. I will stay the course. My scorecard already helped me focus on companies with lower debt and strong balance sheets, and I will keep exposed to companies addressing long-term challenges such as climate change and resource shortages. The Rookie Investor scorecard, combined with detailed valuation scenarios, will guide me in deciding which positions to close, and which to add to, but do not expect significant changes to my portfolio.

I also keep my 3.5% Gold, 4% Bitcoin and 20% Short SPY positions untouched to give me some quick dry powder in case the market turns sour.

If the S&P500 fall below 3700, I will close my short SPY and add to my highest conviction stock positions. If it goes the other way and investors get too excited, I will consider selling my lowest conviction stocks and add to my short position of the S&P500 or the more Tech heavy QQQ ($PSQ was added recently to eToro) to better hedge against my current holdings profile. Too excited for me would be seeing the SPY climb past 4100.

Be prepared for more volatility.