2022 is one of the worst years for financial markets in modern economic history. The stock market is in a bear market. Bonds, often a safe haven when stocks fall, were also hit hard.
The past year has been tough for investors because they had nowhere to hide.
Let’s recap some of our key takeaways for 2022:
In the short term, anything can happen
U.S. stocks and bonds rarely fall at the same time in the same year. In fact, this has only happened three times between 1928 and 2022.
Typically, when stocks fall, investors flock to the safety of fixed-income products, so bonds provide protection for people’s portfolios.
But in 2022, part of the decline in stocks is due to the impact of the bond market. To help combat the highest inflation in four decades, the Federal Reserve has aggressively raised interest rates.
The scale of the losses is unprecedented in the history of modern financial markets because of the low yields on bonds.
In 2022, the U.S. stock market will fall by more than 18%, while the U.S. bond market as a whole will fall by 13%. The 10-year Treasury note fell more than 15%, while long-term government bonds fell more than 30%.
So, it’s not just the first time in decades that U.S. stocks and bonds have fallen in the same year, it’s the first time in history that stocks and bonds have fallen by double digits in the same year. It’s ample evidence that 2022 is one of the worst years for traditional stock and bond portfolios.
Last year was a reminder that in the investment market, anything can happen in the short term, even things that have never happened before.
2022 is an extremely hot year for the US real estate market. As of the end of 2021, the Case-Shiller National Home Price Index is up nearly 20% year-over-year.
One of the biggest reasons for house price increases is the ultra-low interest rate environment created by the COVID-19 pandemic. At the start of 2022, the mortgage rate for a 30-year fixed-rate loan is still just 3.1%. But that didn’t last long.
In 2022, mortgage rates have more than doubled, with the national average mortgage rate exceeding 7.1% at one point, and around 6.4% at the end of the year.
Some predicted a much-needed respite in the housing market last year, but absolutely no one predicted that mortgage rates would rise significantly anytime soon.
House prices are finally starting to cool across much of the U.S. thanks to a sharp rise in mortgage rates.
Last year reminded us that price predictions are often influenced by economic and market variables that most people simply cannot predict in advance.
no stock goes up forever
Tech stocks were the big winners in the 2010s. Companies like Apple, Amazon, Microsoft, Facebook, and Google have grown so large and dominated their industries that they think the only option for their stocks is to buy them.
As the saying goes, success on Wall Street has always been easy to lose, because expectations have soared, making it almost impossible to continue to achieve results that exceed investors’ expectations for the future.
In 2022, tech stocks finally experienced what would happen with such high expectations. In 2022, some of the largest technology stocks fell from their all-time highs and experienced a peak-to-trough process.
Some of these companies are some of the biggest and best in the world, but their stock prices have started to fall after big gains.
Last year reminded us that even the best companies can lose a lot if they buy their shares at the wrong price.
Big gains usually come with big losses
During the COVID-19 pandemic, many assets and securities are rocket ships, delivering huge returns to investors. In 2020 and early 2021, investors made a lot of speculative investments.
In late 2021 and 2022, many assets that have skyrocketed in value will depreciate significantly:
The best-performing assets in boom times are often the worst-performing assets in busts, and the past few years have been no exception.
Last year reminded us that in financial markets, you can’t just make big returns and never take big losses.
In the investment market, losses are inevitable
2022 is one of the worst years ever for the stock market, but those losses make more sense when placed in the context of previous gains.
Last year, the S&P 500 fell 18%, but in the three years before that, the index rose 31%, 18% and 28%. Even with the sharp drop in 2022, the S&P 500 as a whole is up more than 60% since 2019. This equates to a yield of 13% per annum, which is very impressive.
Last year reminded us that the current economic depression is not optimistic, but if you can have a big picture and a long-term mindset, in the end your gains will outweigh your losses. (Fortune Chinese website)
Individual securities mentioned herein may currently be held, have been held or may be held in the future in the author’s personal portfolio or in a portfolio managed by Ritholtz Wealth Management.
Translator: Liu Jinlong
Reviewer: Wang Hao
2022 was one of the worst for financial markets in modern economic history. Stocks went into a bear market. Bonds, typically a bastion in a storm for equities, also got hit hard.
It was not an easy year for investors, because there was nowhere to hide.
Let’s look at some of the biggest lessons from the year that was in 2022:
Anything can happen in the short run
It’s rare for US stocks and bonds to be down in the same year at the same time. In fact, it’s only happened three times since 1928 before 2022:
Typically, when the stock market falls, bonds provide the ballast to your portfolio as investors rush into the safety of fixed income.
In 2022, however, the decline in stocks happened in part because of what’s been going on in the bond market. The Fed aggressively raised interest rates to help fight the highest inflation in four decades.
Since bonds were starting from such a low yield, the losses have been larger than anything investors have seen in modern financial market history.
The US stock market fell a little more than 18% in 2022, while the aggregate US bond market was down 13%. Ten-year Treasurys were down more than 15%, while long-term government bonds crashed more than 30%.
So this was not only the first time in decades that both stocks and bonds were down in the same year, but it’s the first time in history that stocks and bonds were each down double-digits in the same year. be made that 2022 was one of the worst years performance-wise for traditional stock and bond portfolios ever.
Last year is a good reminder that anything can happen in the short term when it comes to the markets, even stuff that’s never happened before.
Predicting the future is hard
The US housing market came into 2022 scoring hot. The Case-Shiller National Home Price Index was up nearly 20% year over year by the end of 2021.
One of the biggest reasons for the housing price boom was the ultralow interest rate environment that came about because of the pandemic. Coming into the year, mortgage rates for a 30-year fixed-rate loan were still just 3.1%. last long.
Mortgage rates more than doubled in 2022, reaching upwards of 7.1% for the national average before ending the year at around 6.4%.
There were people predicting the housing market would take a much-needed breather last year, but absolutely no one was forecasting mortality rates would get so high in such a short period of time.
Housing prices are finally starting to roll over in large part because of this massive move higher in mortgage rates.
Last year is a good reminder that price forecasts are often impacted by economic and market variables most people cannot possibly predict in advance.
Nothing works forever
Technology stocks were the big winners of the 2010s. Companies like Apple, Amazon, Microsoft, Facebook, and Google became so big and dominant that they were beginning to feel like one-decision stocks—and that decision was to buy them.
There’s an old saying that nothing fails quite like success on Wall Street because expectations soar so high that it becomes nearly impossible to continue outperforming what investors think will happen in the future.
Technology stocks finally experienced what it was like to deal with such lofty expectations in 2022. These were the peak-to-trough drawdowns from all-time highs for some of the biggest tech stocks in 2022:
These are some of the biggest and best companies on the planet, but stock prices can only go so high before gravity kicks in.
Last year is a good reminder that even the best companies can lead to big losses at the wrong price.
Big gains are typically accompanied by big losses
The pandemic boom times saw a number of assets and securities take off like a rocket ship with massive gains. Investors bid up a number of speculative investments in 2020 and early 2021.
Many of those rocket ships came back to earth in late 2021 and 2022:
The best performers of the boom times are often the worst performers of the bust times, and the past few years were no different.
Last year is a good reminder that you cannot earn outsize returns in the financial markets without the potential for outsize losses.
Losses in the markets are inevitable
2022 was one of the worst on record in the stock market, but those losses make a lot more sense when you view them in the context of the gains that preceded them.
In the three years before last year’s 18% loss in the S&P 500, the index was up 31%, 18%, and 28%. Even with large losses in 2022, the S&P 500 is still up well over 60% in total since 2019 . That’s good enough for 13% returns per year.
Last year is a reminder that downturns are never fun to deal with in the moment, but if you are able to zoom out and keep a long-term mindset, eventually the gains outweigh the losses.
Certain securities mentioned in the article may be currently held, have been held, or may be held in the future in the author’s personal portfolio or a portfolio managed by Ritholtz Wealth Management.
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