Many investors are more than ready to turn the page on a turbulent 2022. This was a tough year where inflation soared, central banks aggressively hiked interest rates, stock markets fell and war broke out in Ukraine.
In 2022, core bonds did not fulfill their traditional role as a ballast against market volatility. In a year when global stocks slid (-14.5%), investment-grade bonds declined by a record breaking (-12.8%). According to Capital Group, “It is understandable if investors are disappointed, but outcomes like this have been rare. In fact, last year was the only time in the past 45 years that stocks and bonds fell in tandem as shown in the chart below. The conditions that led to this outcome have been rare. At a time when rates were near or below zero, the U.S. Federal Reserve and other major central banks initiated a series of aggressive hikes to tamp down inflation.” The Fed raised the federal funds rate by 425 basis points (4.25%) in the span of nine months in 2022. This was the second fastest hiking cycle since World War II.
Sources: Capital Group, Bloomberg Index Services Ltd., MSCI. Returns above reflect annual total returns in USD for all years except 2022, which reflect the year-to-date total return for both indexes. As of 11/30/2022. Past results are not predictive of results in future periods.
After such a tough year for balanced portfolios, some investors are starting to ask if they should abandon bonds altogether. We caution against this approach. One silver lining of the Fed’s aggressive tightening is that rates have risen so fast that bonds finally offer respectable yields around 4%. With these increased yields, bonds are positioned much better going into 2023 than last year.
Stocks and bonds will continue to experience volatility as markets react to inflation data, the Federal Reserve’s actions and comments, slowing global growth and recessionary concerns, but here’s to a stronger 2023!
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