Beyond The Headlines

H1 2022 & H2 2023 Review

It feels a lot calmer – that’s how I described the last six months to one of the clients recently.

August 3, 2023 | Bogumil Baranowski
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We witnessed a whirlwind of events during the three pandemic-stricken years from 2020 to 2022. Investors endured a crash and recovery in 2020, a broad bull market in 2021, followed by a year of pause and correction in 2022.

Throughout these years, market participants and all of us experienced major shifts. Interest rates were slashed to zero before soaring to multi-decade highs, the economy plunged only to rebound significantly, and the stock market embarked on its own tumultuous journey. The post-pandemic boom era ushered in a wave of “right-sizing” among businesses.

The year 2021 was a true litmus test for many investors. I can’t recall a time when the fear of missing out was more pronounced. It seems that even the most disciplined and seasoned market participants were enticed to take a leap, often resulting in losses from investments in profitless businesses, digital assets, and more. The surge in speculative activity may have broken some records.

In contrast, 2022 seemed to be a rude awakening for many. We, however, focused on remaining patient, disciplined and deliberate, and our decisions about what NOT to invest in mattered. In essence, we steered clear of the most overheated market segments. Interestingly, the 2022 sell-off saw both stocks and bonds decline in price overall. A more nuanced view reveals that bonds with longer-term maturities dropped more significantly due to the swift rise in interest rates. To prepare for such a potential surprise, we kept our idle cash in short-term US treasuries.

So far, 2023 has brought in relative calm, especially compared to the previous two years. After trillions were lost, the fervor around cryptocurrencies, NFTs, SPACs, Meme stocks, and more has notably declined. This quieter atmosphere has been a welcome respite for us. We’ve stayed true to our principles, continually identifying opportunities and making strategic investments when the prices have been reasonable. Slow and steady.

Since the Last Market Update Letter (8/2022)

In our previous letter, we highlighted the cyclical nature of economic indicators, noting that several key measures — such as interest rates, the 10-year treasury rate, and unemployment — had returned to pre-pandemic levels. Likewise, many stocks relinquished the gains they made during the pandemic rally.

However, that’s not an accurate reflection of the current state. Interest rates have continued to climb, the market — particularly the tech sector — has persisted in its recovery, and large-scale tech layoffs have garnered headlines. The conflict in Ukraine rages on, oil prices reached a peak before marginally retreating, and the shadow of a potential recession seems to loom over investors’ minds. Moreover, the market’s recovery has been uneven, primarily driven by a small subset of large-cap stocks.

Inflation, Recession and Interest Rates

We are stock pickers, business pickers. We choose businesses we’d like to own and decide what price we are willing to pay. With the bottom-up mindset, we do keep an eye on the top-down big picture. No matter how great the businesses are, they all operate in a certain macroeconomic context. We don’t make any particular predictions, but we do look out the window.

As we shared last time, those three years may feel like a round trip for many investors, but inflation is a metric that was in a different place than anything we have seen in some 30-40 years.

Inflation started to cool down from the peak read of 9.1% in June 2022 (the highest in 40 years) to 3% in May 2023. Fed Fund rate went up from 0% in March 2023 to 5%-5.25% after the last hike in May 2023 (the highest level since 2007, the fastest speed of hikes). We welcome higher rates, it’s nice to see a healthy yield on idle cash, and a tone down speculative activity that zero rates invited earlier.

The other phenomenon is the inverted curve yield. It’s a moment when near-term rates are higher than long-term rates. Looking at the difference between the 10-Year Treasury and a 2-Year Treasury, it dropped to a negative 1%, and it’s reversing recently. The last time it was negative was in 2006, and it hasn’t been this negative since 1981. It’s usually driven by higher demand for long-term government bonds, which implies an expectation of a decline in longer-term rates as a result of deteriorating future economic performance.

A combination of pandemic-era supply and demand shocks combined with a massive fiscal and monetary intervention fired up inflation to levels we haven’t seen in 40 years. It’s encouraging to see the inflation cool down. High inflation can be a very disorienting force for all market participants, from consumers to businesses and governments.

The economy has slowed down with a 2% real GDP growth, below the 2021 level of 4-7%, but it’s above two slightly negative reads in the first half of 2022. Beyond the economic pandemic ups and downs, including a negative 30% in q2’20 and up 30% in q3’20 (GDP change), businesses seem to be “right-sizing” and searching for a new normal, more sustainable level of sales. This ebb and flow has caused a lot more variety in stock price outcomes – more to choose from for a discerning stock picker.

We are yet again reminded how the market is not the economy, and the economy is not the market. When many may feel the least comfortable investing given the macro backdrop, the best opportunities may abound.



More opportunities in an uneven market recovery.

With the rollercoaster ride of the last few years, we are returning to fundamentals – earnings, cash flows, profits – all that businesses are really about. A lot of former market darlings have experienced a big 50-90% price collapse. Many of them are still of no interest to us. The market, though, has knocked down many quality businesses to prices we haven’t seen in a while, and they still haven’t participated in the recovery. Some companies are a lot better than they were before COVID and may start to look increasingly attractive.

If you look closer at the last 6-12 months and the YTD rise in stocks, it’s driven by a handful of stocks that are up and brought the indices higher, but many are down or flat. The S&P 500 without seven mega-cap stocks was still flat for the year only in May. The other way to analyze it is to compare the index between the market cap weighted (which is how it’s built) and equal-weighted (where each stock has the same position size); they usually track each other as the market rises more broadly. It’s very glaring to see how the two metrics were in sync until March looking YTD, and the gap grew to 10 percentage points.

Bank runs and AI.

In addition to general market observations, we think it’s crucial to highlight two phenomena: bank runs and the emergence of AI (Artificial Intelligence). If this letter were a time capsule, these two occurrences would certainly be remembered.

In brief, the sharp rise in interest rates resulted in substantial paper losses for some banks due to the treasuries they held. Banks profit from borrowing at lower rates and lending at higher ones. However, the rapid shift in interest rates, the fastest on record between 2022 and 2023, had a damaging effect on some banks. Those that experienced the most substantial deposit inflows in the previous year were hit hardest. Simply put, they invested the most at the worst of times right ahead of a historic rate spike.

Banks depend on the confidence of their depositors. While banks could have simply waited for the full payout from the bonds they held upon maturity, the erosion of client trust triggered bank runs, a phenomenon not seen in the U.S. since the Great Depression. Fortunately, the intervention of the regulators helped to restore depositor confidence.

Separate from banking issues, AI has been a key topic of discussion this year. Although AI isn’t new and is widely used in everything from movie recommendations by streaming services to fraud detection at your bank, one AI application has especially captivated public attention: ChatGPT (Chat Generative Pre-Trained Transformer).

Released in late November 2022, and having garnered over 100 million users by June 2023, ChatGPT started to revolutionize how we find and organize data through conversational interaction. It’s innovative, though not without flaws, and its effectiveness is largely dependent on the data it can access and the quality of the questions it’s asked.

As often happens in investing, novel and exciting developments don’t always make for obvious investment opportunities. We’re still observing how ChatGPT will impact existing business models, professions, and even education as a whole, and what kinds of new innovations it will inspire. This anticipation and uncertainty are a fascinating aspect of investing, as we strive to identify emerging sources of profit and cash flow amid the constant flux of business evolution.

Nonetheless, ChatGPT, and artificial intelligence chatbots in general, we believe represent some of the most thrilling technological trends in recent history. We eagerly watch their progress, incorporate their utility where applicable, and anticipate their continued evolution and development.


Long-term Goals

Our long-term goal remains the same for all the assets we manage. We intend to both preserve and grow the capital over time. We seek to double our clients’ wealth every 5-15 years, which translates to a 5-15% annual rate of return over the long run, but we would like to accomplish it without exposing the portfolios to the risk of a permanent loss of capital. Of course, performance cannot be guaranteed, and past performance is not indicative of future results.

Our strategy can be described as a long-term patient contrarian. All securities are selected through an in-house research process. Our investment horizon for each individual holding is usually 3-5 years.

We intend to hold between 30-60 stocks, mostly US equities, but we may invest in foreign securities as well. We don’t use any leverage; we don’t own any derivatives. We may supplement the strategy with exchange-traded funds (some of them may use leverage or derivatives).

We don’t have a predefined portfolio composition target. We may hold cash at times, but we prefer to own businesses, and when the opportunities abound and prices are right, we will likely be close to fully invested.

What we wrote before applies today: “as much as we pay attention to the overall market trends, we like to look at our performance independently from the benchmark. As long as the businesses we own report improving fundamentals, and the market eventually prices them accordingly, we are happy.”

What’s ahead?

The COVID years brought about a lot of innovation, big leaps in productivity, new ways of doing business. At the same time, big capital was raised to fund a lot of new projects, while recent tech layoffs are making talent available to smaller, promising businesses without the scale of their mega-cap peers.

As public equity investors, we are curious to see what kind of new companies will grow out of this peculiar set of circumstances and have already become public or will become public in the coming years.

We believe the US economy is still the biggest, healthiest, and most diversified in the world. Given its depth, size, and liquidity, the US stock market seems to remain the most appealing home for the most innovative, new companies, even if they originated in Europe, Asia, Africa, Australia, or South America. At the same time, US companies can be global and benefit from long-term growth and prosperity around the world. They operate under US laws, follow US disclosure requirements, and promote a shareholder-friendly culture, making them appealing investment choices for us. We are optimistic about the US, and the US business, while near-term, we remain cautious about the stock market as a whole. We are happy with our stock portfolio of selected, vetted, well-researched businesses.

What do we expect going forward? We build the portfolio for any possible scenario, and our goal always is to be the least wrong with our investment choices. Given the level of uncertainty from inflation, economic slowdown, interest rates to new policies, various geopolitical shifts and tensions, we’d expect more buying opportunities for patient and disciplined investors.


There were a few pivotal moments in the last three years. First, we acted quickly in March 2020, and built up positions in a variety of quality businesses. We held a steady course in 2021 when we saw FOMO-driven speculative spirits took over the markets. In 2022, what we didn’t own helped us the most, while our holdings held their ground. Through the last 18 months, we added a new selection of stocks that became available at attractive prices as the market corrected.

We have been happy with the holdings we bought, and their performance shows that stock selection mostly met or even exceeded our expectations.

We remain optimistic about the long-term growth prospects of the US and the world economy.

Slow and steady wins the race remains our mantra as we look ahead toward new investment opportunities.  


Happy Investing!

Bogumil Baranowski

Published: 8/2/2023


The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.