Tying a ribbon on a lousy year…
2022 was a bad one. Real bad.
The S&P 500 index fell more than 18%, ranking as the 7th worst year going back to 1928 (95 years!). In some ways it was worse than that final number indicates. There were three separate rallies of 10%+ to provide false hope during the year – and three separate declines of more than 12%. Ouch.
Adding salt to the wounds, bonds also took a severe beating. When stability was needed the most, bonds didn’t come through. Far worse, the broad bond market actually fell over 13%. According to market historian Edward McQuarrie of Santa Clara University, it was the worst year ever for bonds – going back 250 years! We’ll take his word for it… centuries-old data can be hard to come by (written with quill pens and all). Nevertheless, it’s fair to say 2022 qualifies as “100-year flood” bad.
The “double-whammy” is a rare occurrence – stocks and bonds falling in the same year has happened only three other times going back to 1928. The worst performance for bonds in those prior three situations was a loss of 5% in 1969, and that was a year when stocks dropped less than 9%. In the other two scenarios, bonds fell less than 3%. So double-digit losses for both stocks and bonds is a real outlier.
What happened? Inflation hitting a 40-year high and the Federal Reserve raising interest rates at a record pace were the primary culprits. Inflation had been viewed as a temporary result of the pandemic, but it became apparent that was not the case. In turn, the Fed took aggressive action to try and stem the inflationary tide. These were circumstances that didn’t receive much consideration at the start of the year.
The good news is that inflation seems to be decelerating, At year-end, Fed officials were forecasting that rate increases would be smaller and slower going forward, likely increasing by less than 1% from here. Should we take comfort in that? Perhaps. Signs that we are nearing the end of the “rate hiking cycle” should be good for financial markets. But we should also keep in mind that at the beginning of 2022, no Fed committee member anticipated rates above 1.25% for the year (off by roughly 3 percentage points). In other words, even the Fed couldn’t anticipate what the Fed was going to do.
Is there a lesson to be learned? It’s as simple as this: We just never know. (And the Fed doesn’t know either.) The past can sometimes give us clues to the future, but it certainly doesn’t provide a blueprint. Tech stocks like Netflix and Facebook (Meta) posted huge gains in 2020 and 2021, only to plummet more than 75% from their highs in 2022. Any one year can be drastically different from the next.
Diversification generally works well most of the time, but unusual things can still happen. Yet, not diversifying can be much, much worse. It’s not perfect and it’s not fool-proof, but diversification remains the best long-term strategy to deal with a world that is full of the unexpected. Stick with it – better days almost certainly lie ahead!
How do we bring you financial peace in this environment? The key is good financial planning to ensure you can adapt to fluctuating economic conditions. We revisit your projections every year to help you make minor adjustments early if needed to maintain financial stability. We take into account that there will be periodic economic downturns throughout your financial lifecycle.
Since the downturn, we have provided projections to our clients and they are happy to learn that they need to make little to no adjustment in how they are living their life. This is financial peace.
Thank you for allowing us to be of service when it comes to this important aspect of your life!
