So Far, 2022 Has Been Off The Charts
The stock market is a device which transfers money from the impatient to the patient.
— Warren Buffett
Have you been watching the stock markets this year? It would be hard not to. Even if you were extremely laissez-faire about your portfolio, the constant ominous headlines on news about recessions, inflation, rate hikes, and now the possible use of nuclear weapons would be enough to make anyone squirm in their seats.
Stocks are an ownership share of the future profits of companies around the world; bonds are loans taken out by the companies around the world. As such, the factors that cause the prices of stocks to change are usually different from those that cause the prices bonds to change. However 2022 has been off the charts because both stocks and bonds have suffered double digit losses so far. Investors who love risk are now suffering losses as equities are down. Meanwhile, conservative investors, with balanced or moderate risk portfolios, are also suffering losses as bonds are down. In essence, there has been nowhere to seek shelter.
The chart below shows the historical annual performance of stocks and bonds since 1970. You may notice that losses for both stocks and bonds don’t happen often. To find when losses for both stocks and bonds were in the double digits, you would need to go back to 1973. Even in the most recent devastating recession — the 2008 global financial crisis — bonds edged out positive gains whilst stocks collapsed to over a -40% loss
Arguably the world in 1973 was very different from now. The 1973-74 recession was a period of stagflation (high unemployment and high inflation) caused by:
The massive deficits in the US caused by Vietnam war spending,
The OPEC oil crisis embargo which caused oil to spike to $140 a barrel (adjusted to today’s value),
The collapse of the Bretton Woods monetary system where foreign currencies were pegged to the USD which was then pegged to gold.
So with such an “extraordinary” year, what can we expect going forwards? If you were beginning to feel that bond prices may continue to tumble on, stop right there and look at the chart below. The data from Dimensional Fund Advisors on quarterly returns in the bond market since 1976 to early 2022 shows that what happened in the past does not necessarily predict the future.
The top chart arranges bond returns from worst to best for each quarter. The bottom chart then shows the next 3 months returns. You will see that the worst quarter (a loss of nearly -10%) was then followed up by a great quarter (a gain of nearly +20%). However, the next worst quarter was only followed up by a small gain. It is sometimes bad, sometimes good. What is clear is that there is no discernible pattern in current performance and future returns; this means you shouldn’t automatically assume that the next 6 to 12 months will be similar to what we experienced so far this year.
What about stocks then? Using the US stock market data which stretches for nearly 100 years, stocks averaged positive returns after double digit declines. For example, after a -20% loss, the market bounced back with an average gain of +22% the following year.
Source: Dimensional Fund Advisors
So far, 2022 has definitely been a tough year for investors. However, if you have continued to stay invested, avoided meddling with your portfolio, or are looking for the opportunity to take advantage of these depressed prices now by deploying more dry powder, then give yourself a pat on the back. You are one of few investors out there.
Taking things into context and looking at history as a guide, there are far more good years than bad years in investing. And declines such as what we have experienced this year are usually followed up by more positive years as markets recover and continue to go on to make new highs.
If you are still worried with whatever is still going on in the world and how it could affect your life plans and investments, come and speak to us.
