To say that 2022 was an eventful year would be a huge understatement. Sky-high inflation and attendant aggressive interest rate hikes, war in Ukraine and U.S. midterm elections are just the start.  I tried to highlight notable events in various arenas in Exhibit 1. In Exhibit 2, I tie some of the news stories to the stock market. It shows the weekly % changes in the S&P (green and red bars) and the level of the index (black line).  The annotations are the major stories of the year that [could have] affected the markets.

Lest you think that absolutely nothing good happened in 2022, here is a list of amazing scientific breakthroughs from last year.

Exhibit 1 – Notable events in 2022

Exhibit 2 – 2022 S&P 500 Timeline

So what was the result of all these unfortunate events? Exhibit 3 shows 2022 performance for major asset classes and it ain’t pretty. There were few places to hide, with only the dollar and oil positive. Gold was basically flat which is an accomplishment in this environment. Crypto currencies had a terrible year with Bitcoin off 65%. Stocks of all types were down 15% or more. Growth stocks represented by Nasdaq were crushed by 33% (although their longer term numbers still trump everything else). Perhaps the most difficult to process was carnage in fixed income with all manner of bonds off by double digits.

Exhibit 3 – 2022 Performance for Major Categories

Let’s also look at detailed fixed income universe breakdown (Exhibit 4). Long-term bonds, which are the most sensitive to Fed’s interest rate hikes, dropped by 30-40%. And those are U.S. Government Treasuries, not some junky securities! International bonds also had a terrible years due to combination of rising rates and strong dollar. Short term bonds had the smallest declines as did Senior Loans (which pay adjustable rates).

2022 was a truly horrible year for bonds, by far the worst since Bloomberg U.S. Aggregate Bond Index was launched 46 years ago in 1976 (Exhibit 5). Second worst was -2.9% in 1994, so -15% is quite abnormal. Moreover, while bonds tend to offset large drops in stocks (indeed that is why we have them in portfolios as ballast), it failed miserably last year. Ben Carlson had a nice post putting stock, bond and 60/40 portfolio returns in historical perspective and looking at what it might mean for future performance.

Exhibit 4 – 2022 Performance by Fixed Income Groups

Exhibit 5 – Bloomberg U.S. Aggregate Bond Index Annual Returns

 

In the next post, I will take a closer look at sector and stock performance.