While 2022 has been a tough slog, sometimes you come up with a chart that truly captures how rough a slog it has been. Let’s take a look and then comment:
So what are we looking at? We are looking at a scatter plot of total returns for the 10-year UST and the S&P 500 going back 100-years. We have highlighted the four worst years for the stock market – 1931, 1937, 1974 and 2008 – as well as 1969 and the current year (in red). As you can see, 2022 has not been the worst year for the stock market (it currently ranks 7th worst on a total return basis), but it stands out as one of the only years in which both the stock market and the bond market have both offered no quarter.
The closest year might be 1969, which saw the 10-year generate a -5.2% total return and the stock market return a -11.6% total return, but even these fall well short of the current -16.7% and -17.9% respectively that 2022 has offered. In fact, if we graphed the same data, but added the difference between 2022 and 1969, the differential between the two years (again in red) would be an outlier:
Okay, let’s stick with this theme and look at an oldie, but a goodie, before transitioning to new chart:
Now, you may have already seen the S&P 500 pyramid, which breaks returns down into bands (note that this pyramid only goes back to 1945). As you can see, 2022 fits into a fairly popular band (-10% to -20%), so nothing truly unprecedented here. Okay, let’s now introduce the 10-year treasury pyramid:
Here, again, we can see the “outlier” nature of 2022, as we literally have to skip over a band that we have never used before in order to get to the return year-to-date. So, when you hear people say – “this has been the worst year ever for bonds”, they are not kidding. Okay, let’s combine the two above and look at a 60/40 pyramid:
Here, 2022 is less of an outlier; although, it does rank with the three worst 60/40 years since the end of WWII along with 1974 and 2008. In fact, if we scatter plot a time series of the 60/40 portfolio, we can see not only how 1974, 2008 and 2022 stand out, but also how 2022 is on pace to be the worst total return year for a 60/40 portfolio since the end of WWII:
Final Thoughts: So, in many senses, 2022 has been the worst year for investors since the end of WWII. While I do not think we are done in terms of downside risks, I think most, if not all of it from here comes from the equity side.
While long bond yields continue to probe levels they have not seen in a decade+, I do think we have potentially come close to “jumping the shark” as it relates to what the Federal Reserve will do from here.
Yes, the Fed was uber-hawkish in yesterday’s meeting, but its forecasts both to the downside and to the upside are generally way off the mark (just a year ago, the Fed was forecasting a 2% terminal Fed Funds rate) and considering that the 75% of the inflation basket that is not Owners’ Equivalent Rent (see our previous blog - Inflation: We Can't Quit You) is already deflating (while the supply chain is largely fixed and freight and port bottlenecks are resolved, not to mention a sharp drop in demand for goods), I see no reason why this time (forecast) will be any more accurate.