2022: The Year in Review

From the onset, 2022 was a very challenging year for investors and financial markets alike.  As global economies shrugged off the malaise of the coronavirus pandemic, new problems popped up to sow the seeds of uncertainty in the minds of many investors.  Inflation reached levels not seen in four decades in the US and other developed countries, prompting the Federal Reserve and other nations’ central banks to pursue aggressive interest rate hikes.    The invasion of Ukraine by Russia in February introduced new uncertainty about geopolitical stability and disrupted supply chains for energy and food throughout Europe and Asia.  Additionally, the US midterm election clouded the picture for domestic investment markets in the months leading up to November.

Equity Markets Plummet

So just how bad was 2022 for equities? The S&P 500 Index fell to a two-year low in September.  At one point during the year, the index gave back 50% of its post-pandemic gains.  By the end, the S&P 500 index had its worst year since 2008, falling 18.1% for the year.  But the S&P 500 was not the only stock index experiencing steep declines.  The MSCI All Country World Index, which measures global equities, dropped 18.4% for the year.  Developed international Markets, tracked by the MSCI World ex USA Index, lost 14.3% and emerging markets, represented by the MSCI Emerging Markets Index, lost 20.1%.  According to data collected by Morningstar, 36% of US stock mutual funds with inception dates before 2021 experienced their worst year ever.

Exhibit 1: The MSCI All Country World Index Fell 18.4% in 2022.

In USD. MSCI All Country World Index, net dividends. MSCI data © MSCI 2023, all rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Headlines are sourced from various publicly available news outlets and are provided for context, not to explain the market’s behavior.

Bond Market Meltdown

Adding to the consternation felt by many investors in 2022 was the historically bad year for the US bond market.  According to Edward McQuarrie, professor emeritus at Santa Clara University who studies historical returns, 2022 was the worst year for the US bond market.  “Even if you go back 250 years, you can’t find a worse year than 2022.”

Investors generally view bonds as safe investments, holding or increasing in value when equities drop.  This was not the case in 2022. While it is rare for both equities and bonds to lose significant value in the same calendar year, it has happened in the past.  Aggressive rate hikes by the Federal Reserve were the primary culprit for the sharp losses in the domestic fixed income market, with long maturity bonds feeling the sharpest sting.  Long-term US Treasury bonds fell a whopping 29.3% in 2022, while domestic long-term investment grade bonds lost 27%.  The aggregate Total Bond Market index lost 13.1% in 2022.  According to data collected by Morningstar, 78% of the US bond mutual funds with inception dates before 2021 experienced their worst performance year ever.

Looking for Bright Spots

With all the poor performance data it may not seem like there were many reasons to be optimistic in 2022, but there were some silver linings in the cloudy financial outlook.  One reason for optimism going forward is that value stocks have outperformed growth stocks handily the past two-and-a-half years.  Because value stocks outperform growth stocks historically, we tilt our investment portfolios towards value.  Since June of 2020, US value stocks have beaten growth by 10.1 percentage points on an annualized basis.  This trend should continue as higher interest rates are expected to negatively impact growth stocks by increasing borrowing costs.

Despite the drubbing bonds took this year, the yields on bonds and other fixed income investments are moving closer to historical levels and becoming attractive again.  For retirees and investors moving closer towards retirement these yields should translate into higher returns for the bond portion of their portfolio.  This often translates to more consistent and predictable investment returns and more reliable streams of retirement income.  Once the Federal Reserve completes their course of interest rate hikes, we should see the fixed income market stabilize and bond losses dissipate.

Years like 2022 do not come around very often, thankfully. We have already seen some positive developments in market returns, but we still have ways to go in the market recovery.  To make sure you are positioned to benefit from future rebounds please call our office or visit www.bollinwealth.com to schedule time to meet and discuss your financial plan.

Sources:  Cnbc.com, Dimensional Fund Advisors, Morningstar.com, The Wall Street Journal