2022 was the worst year since 1937 for this investment strategy: Here’s what history happens next

2022 was a historic year for the market, but not in a good way. Post-pandemic inflation, war in Europe and widespread lockdowns in China are just a few of the problems that plagued all financial assets last year.

And while there were far worse drawdowns, S&P 500 index (^GSPC -0.02%) Combining stock market declines with declines in other types of financial assets in recent years could make 2022 one of the worst years in investment history.

Worst Bond Market Year Ever

Many investors, especially retirement investors, typically not only own stocks, but also hold a portion of their portfolio in bonds. Bonds are a fairly broad term, but many investors in the stock market, which impacts corporate health, choose to balance their equity holdings with longer-term Treasuries.

why treasury? Because government bonds are backed by the full trust and credit of the U.S. government, which has the power to collect taxes. During times of market downturn and corporate earnings uncertainty, Treasuries are considered a “safe haven” asset. In a historical recession scenario, investors typically buy government bonds because the required “risk-free” yield drops in anticipation of lower economic growth.

So the idea behind the standard 60/40 portfolio asset allocation is that when stocks fall due to an economic downturn, Treasury bonds will rise in value, reducing overall portfolio volatility. This is what happened in his 2008 market crash. Equities plunged him 37%, while 10-year Treasuries returned +20.1%, and in a 60/40 portfolio he fell just 14.2%.

But 2022 was no ordinary recession

But 2022 has been a strange year. Long-term U.S. Treasuries have historically low yields as he entered 2022, with 10-year Treasuries yielding just 1.51%. As a result of last year’s spike in inflation, the 10-year interest rate surged throughout 2022, eventually reaching well over 4% and ending the year at 3.88%.

As such, a rise in interest rates would actually reduce the value of the 10-year bond. autumn However, 10-year Treasuries plunged 17.8% not only in 2022.It’s Actually the Worst Performance of a 10-Year Treasury Bond in recorded historyAnd the 30-year US Treasury bond fell a whopping 39.2%. This is the lowest performance ever for U.S. Treasuries going back to his 1754, when the data was first collected. It was before the American Revolution.

It’s been a bad year.

Image Source: Getty Images.

Bond Crash Makes 60/40 Portfolio Return Worst Since 1937

Although the S&P 500’s 18.1% decline was heartbreaking, it was the fourth-worst stock market year in 50 years and only half of the 37% decline in 2008, compared to the 22.1% and 25.9% declines of 2002. It was better. But with each of these modern-day stock market crashes, the value of 10-year Treasuries rose in tandem, offsetting stock market losses.

However, investors who tried to limit volatility with a 60/40 portfolio in 2022 suffered an aggregate loss of 18%. This was the worst performance of his 60/40 portfolio dating back to 1937, when the 60/40 portfolio fell 20.7% of his, and the third worst performance in modern history. (The worst was his in 1931, a 27.3% decline.)

Both of these cases were during the Great Depression.

What Happens Next When Stocks and Bonds Both Fall

Since 1928, only four years have both the S&P 500 and 10-year US Treasuries each fallen.

So how do these assets typically perform in the coming year? Fortunately, the record looks pretty good.

Data sources: billello.blog and nyu.edu. Chart by author.

In three of those four years, the S&P 500 was also positive the following year, with the only exception being 1932, at the height of the Great Depression. And in four out of four years, 10-year Treasuries were positive the following year.

However, before we discuss Champagne, it should be noted that the sample size of 4 years is quite small. And given that 2022 saw both asset classes drop his double digits for the first time, we’re in scarce territory where simple comparisons aren’t possible.

Image Source: Getty Images.

Is this 1974 or 2002?

In general, when an asset class performs poorly, it tends to perform better the following year, which is why we are optimistic. In the post-World War II era, the S&P 500 has fallen 17 times, including his 2022. Out of those 17 times, he’s the only time the market has recorded consecutive losses. Decreased for 3 consecutive years.

Unfortunately, the market decline in 2022 was similar to both times. Inflation ran rampant in the 1970s, a problem exacerbated by his OPEC oil embargo after the 1973 Fourth Middle East War. Meanwhile, his multi-year recession from 2000 to 2002 included the bursting of the high-tech Internet bubble followed by his 9/11 attacks in 2001.

As in 2000, 2022 saw a significant divestment of the highly valuable technology sector. And he noted that as in 1973, this time following the Russian invasion of Ukraine, geopolitical events caused oil prices to skyrocket.

On the bright side, however, inflation has trended lower over the past few months and the job market remains resilient. Fuel prices are also declining from highs. Barring new shocks, the market has a good chance of he recovering in 2023. Another consecutive drop could await the market if another geopolitical event throws a wrench in the market’s recovery.

But don’t let fear keep you out of the market

Maintaining perspective is important. Over the long term, the stock market is the best asset class for preserving purchasing power, with real returns above inflation. Even if he invested in 1972, before the big drop in the high inflation period of 1973-1974, his annualized return over the 50-year period was 9.4%, a real return above inflation. he was 5.4%.

This is a healthy reminder to stick to your long-term investment plans, even with high market volatility and uncertainty. The timing of recovery is unknown, but it should eventually. And it should be worth the wait.