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A Rough Start to the Year

It’s been a rough start for the year in the stock market. To find a worse performance through the end of April, you have to go all the

way back to 1970. It gets far less press but this has also been the worst start to the year for the bond market, going back to 1990. It’s not necessarily the depth of the declines that are hurting, it’s that it’s happening in stocks and bonds at the same time. This has been a painful environment because there really has been nowhere to hide.

Most everyone understands that when they invest in the stock market, there will be ups and downs. In exchange for dealing with the ups and downs, investors normally are rewarded with higher returns over time. Most investors also understand how diversification is supposed to work; when stocks go down, the bonds / fixed income side of my portfolio will buffer the downside. Well, that’s not happening at the moment, which is why, along with inflation, a war, and other factors, this environment feels really bad. These stats tell the story of how rare the current environment is:

  • The last 8 times the S&P 500 was down in a calendar year, Bonds finished the year up, cushioning the blow. Very different story thus far in 2022

  • Number of times US stocks and 10 year bonds have been down in the same year the last 100 years? Twice.

  • With data going back to 1976, this is the first time ever that both stocks and bonds are in a >10% drawdown at the same time.

Going back to 1950, the S&P 500 has had a positive annual return 56 out of 71 years, or 79% of the time. But as we know all too well, stocks don’t go up in a straight line. Temporary declines never feel that way in real time. The average intra-year drawdown going back to 1950 is 13.6%. Interestingly, that’s almost exactly where the market closed on Friday. We’re seeing some individual stocks (and not small ones) have very large declines. We’re seeing losses in bonds that we haven’t experienced in four decades. We’ve got inflation and the Fed removing liquidity from the market. So while it’s factually true that we are right at the average drawdown, there are all sorts of reasons why 2022 doesn’t feel average.