June 16, 2022 by Ethan Gilbert
Today’s Struggles: So far, 2022 has been a historically bad year – especially for bonds. The aggregate bond market is down 11.6%. If the year ended today, that would be far worse than its worst year on record, 1994, when it dropped 2.9% (The index’s inception is 1976). Similarly, global stocks would be seeing their 2nd worst year over the same period, down 22.0%, with only 2008 being worse.
The poor returns don’t tell the whole story because inflation is coming in higher than it has since 1981. Inflation is expected to top 6% this year after rising 7% last year. In those two years, we’ve gotten as much inflation as we had in the previous eight. This reinforces the necessity to look at “real” or after-inflation returns. As expected, they look worse when considering inflation.
The following table shows returns for time periods that were especially bad for investors.
(We used the consumer price index (CPI) as our metric for inflation. For stocks, we the MSCI World Stock Index and the US Aggregate Bond Market Index for bonds. Note that 2022 is a partial year)
Re-examining bond returns on a real-return basis, we see there have been a few years nearly as bad as 2022 when inflation was roaring around 1980.
A major difference though during the 1980s is stock returns were faring better, leading to balanced portfolios (60% stock and 40% bond) performing relatively better. The only time we’ve had a worse year for a balanced portfolio was 2008, entirely due to terrible stock market performance.
Another thing to keep in mind is we’re only talking about a single year. The 2000-2002 stretch was especially rough because it spanned 2.5 years and, when aggregated, was a worse time for investors, again because of very poor stock market performance.
No matter how you slice it, 2022 has been a bad year for investors as meaningful drops in stocks and bonds is unique relative to previous years.
Macroeconomic Reasons for Optimism: We remain relatively optimistic about future market returns. With rising inflation, today is most often being compared to the period around 1974 or 1980 but there seem to be a few key differences.
The situation around energy is significantly better than it was 40-50 years ago. For the first time in nearly 70 years, the US is a net exporter of energy which bodes well for national and global markets. High energy prices are a negative stimulant to the economy. But that should not last forever, as there are enough energy stores both domestically and abroad to meet global demand, thanks in large part to improving technology around fracking. It takes time to ramp up production and develop the infrastructure to turn the resource into a consumer good, but this should work itself out in the coming years and not be a decade-long problem like it was in the 1970s.
Another positive difference is unemployment. Right now, the unemployment rate is 3.6%, less than half of the 7.6% it averaged from 1974 to 1983. 50 years ago, people were struggling to find companies that wanted to hire them. Today, companies have plenty of things they want people to do, but they’re struggling to find the people to do those things. It’s a problem, but one you’d rather have, and indicative of a strong underlying economy. While that can change quickly, we aren’t seeing indicators it has. Today’s jobless claims report showed nearly the fewest continuing claims number on record and there are 11.4 million job openings in the US, nearly double the 6.0 million people surveyed as “unemployed.”
Stay Tuned: If you’ve made it this far, thank you! We’re itching to get into expected returns but that will need to be its own post (or two). In the meantime, stay strong and try not to let the market’s poor performance get you down. Market fortunes can change quickly and it’s never comfortable to be invested. That’s the whole concept of a market – half the participants think it’s a good time to sell at any given time. It may take longer than we’d like, but things will get eventually get better; they always have.