2022 - A Year Like No Other
2022 was a year characterized by abysmal returns for both stocks and bonds. Large company stocks, represented by the S&P 500 fell nearly 20% for the year. Small stocks (Russell 2000 index) fared slightly worse. Technology and growth stocks, which had powered these indices higher over the past several years, declined even more severely than these indices. Fixed income returns - which usually cushion the blow of equity declines - provided no support. The broadest measures of the bond market declined nearly 13%, their worst performance since the creation of these indices in 1976. The previous worst was in 1994 when returns were -2.9%!!!
The pivot of central bankers from the viewpoint of transitory price increases to enduring inflation that must be stamped out led to an unprecedented year of monetary tightening. Globally, central banks raised interest rates in unison - from unprecedented lows in 2022. The substantially higher interest rates have reintroduced a positive cost of capital into markets resulting in significant declines across all financial asset classes. The worst losses occurred in holdings that had been priced for an environment of permanently low-interest rates.
Looking forward, we believe the magnitude of the change in global interest rates cannot be overstated and will require a period of digestion – at home and abroad. There likely will be more bumps in the road. The declines in all asset prices experienced in 2022 have resulted in a more forgiving setup for investors going forward. Markets will continue to adjust, and global economic growth and prosperity will return.
