2022: The Year That Nothing Worked
For 2022, the TSX Composite Total Return was -6.1% and the S&P 100 Index total return was -19.4%. This makes 2022 the worst year for the S&P since 2008 and the fourth-worst year since the index’s launch in 1957.
While it may be the case that the stock market usually goes up, 2022 was a reminder it doesn’t always go up. For investors, this is just part of the challenge when it comes to successful long-term investing. The road to long-term positive returns comes with a lot of ups and downs.
Additionally, the term “diversification”, which we mention frequently as a tool to help offset some market volatility, did not work in 2022. The main reason was higher interest rates pushed bond prices lower. The average return for bonds since 1976 when the S&P 500 fell on the year was 6.7%. Bonds have had a positive return every year stocks fell, except for last year.
Last year was among the worst combined return for stocks & bonds ever. It was the worst year for bonds outright, with a total return of -13%, as measured by the Bloomberg Aggregate Bond Market Index, which dates back to 1976.
In the 40+ years of calendar returns, there were only four down years in the bond market before 2022:
- 1994: -2.9%
- 2013: -2.0%
- 2021: -1.5%
- 1999: -0.8%
How unusual was 2022?
"Negative returns in both stocks and bonds over any 12-month window have occurred only 2% of the time since 1926. A 60/40 portfolio produced a positive 12-month return 80% of the time.The 60/40 portfolio has held up over longer time periods. A 60/40 portfolio generated an annualized return of 8% on a nominal basis and 5.3% on a real basis (adjusted for inflation) over the decade ending in 2022. This compares to an annualized portfolio return of 8.8% in nominal terms and 5.4% in real terms since 1926." (Goldman Sachs).
What this means is that a 60% US Equity/40% US Bond portfolio was down more than 16% in 2022. With both stocks and bonds down big, this ended up being the third worst year ever for a ‘Balanced’ portfolio.
You have to go all the way back to the Great Depression to find two worse years of performance!
Stock market returns get a lot more attention and are usually a bigger part of an investor’s portfolio, but it’s important to note what an outlier year 2022 was for fixed income. Instead of offsetting some of the stock market losses like it typical does fixed income, whether it was bonds, preferred shares, private debt or other fixed income investments, further contributed to a difficult year.
The only asset classes that had positive returns in 2022 were the US dollar and commodities. The latter is an asset class that has historically provided volatile returns and most investors were underweight the sector in 2022.
*A 60% stocks/40% bonds C$ portfolio made of: 21% S&P/TSX, 21% S&P 500, 12% MSCI EAFE, 6% MSCI Emerging Markets & 40% BofA Canada Broad Market.
While many economists expect North American economies to enter a recession in the first half of 2023, the stock market will bottom and inflect upward long before a recession ends. The difficult part is to know what is already priced into markets at current levels.
Additionally, since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods, which are very good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return. As difficult as the last 12 months have been for investors, the history of market cycles shows that there are better days ahead – each of the bad years turned out to be great opportunities for long-term investors.
Yields are now also higher for both stock and bond investors, and because valuations for both have moved lower, total returns (capital gains plus income) are expected to be higher as the stock and bond markets recover over time.
If history is a guide, then the odds favour positive returns in 2023. According to Ryan Detrick from the Carson Group, the S&P follows a negative year with a positive year 80% of the time, with an average gain of 15%. However, Yields are now also higher for both stock and bond investors, and because valuations for both have moved lower, total returns (capital gains plus income) are expected to be higher as the stock and bond markets recover over time.
While there are no guarantees, things should be better for investors in the future, as long as you have enough patience and perspective.
Additionally, it is particularly interesting to see these stats below. Historical return data runs contrary to the consensus call being made around Wall Street of a weaker first half, followed by a rebound. The “Post-Election” stats seem to suggest the opposite.
Historical Returns of the S&P 500 During Election Cycles
Source: Fundstrat, Bloomberg
