Stocks had their worst year since 2008, and bond prices fell as inflation reached a four-decade high. 2022 proved not to be the norm as investors expected bonds to be a safe haven as stocks fell, but due to the Federal Reserve raising interest rates throughout the year in an attempt to combat inflation, the bond market reacted negatively causing bond prices to drop along with stocks. Unique to bonds however, there is a case for optimism as higher interest rates can lead to higher expected returns with bond yields currently at levels that are two to three times higher than a year ago. The 10-year treasury yield on 1/3/2023 was 3.79% vs. 1.63% on 1/3/2022 (U.S. Department of the Treasury).
Value stocks served as a bright spot, outperforming growth by the largest margin since 2000. We are pleased this tilt in our portfolios presented itself so strongly in 2022 to help offset the stock losses – especially in the tech-heavy NASDAQ index down -32.4% in 2022 (Morningstar).
Markets may have been down, but history suggests that it is no time to panic. The chart below shows the performance of a portfolio of 60% stocks and 40% bonds after a decline of 10% or more, which is what occurred in 2022. As you can see the 1, 3, and 5-year returns are very respectable following the down year. We continue to believe that a globally diversified portfolio of stock and bond mutual funds and ETFs is the best way to invest and grow your net worth to support your lifestyle in retirement.
Past performance is not a guarantee of future results
In USD. Drawdowns include all periods where the 60/40 portfolio declined by 10% or more from the prior peak. Peaks are defined as months where the 60/40 portfolio's cumulative return exceeds all prior monthly observations. Returns are calculated for the one-, three-, and five-year look-ahead periods beginning the month after the 10% decline threshold is exceeded. The bar chart shows the average cumulative returns for the one-, three-, and five-year periods post-decline. There are 10, nine, and nine observations for the one-, three-, and five-year look-ahead periods, respectively. Source: Morningstar Direct as of December 31, 2022. Five-year US Treasury notes data provided by Morningstar. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.