FAS Wealth Partners

FAS Market Update January 2023

With inflation raging and interest rates rising at a dramatic pace, most financial markets experienced a painful drawdown during 2022. The S&P 500 finished the year down roughly 18% which is the 7th worst calendar return for the index. However, the result was far from the historic poor years of 1931 and 2008 when the market was down 43.8% and 36.6% respectively.
  • With inflation raging and interest rates rising at a dramatic pace, most financial markets experienced a painful drawdown during 2022. The S&P 500 finished the year down roughly 18% which is the 7th worst calendar return for the index. However, the result was far from the historic poor years of 1931 and 2008 when the market was down 43.8% and 36.6% respectively.
  • What was historic were the effects of rising rates on the bond market. Although the data can be spotty, many economists categorize last year as the worst EVER for bonds. This is evidenced by the fact that an index tracking 30-year U.S. treasury bonds was down a remarkable 39.2% over the course of the year. This result was the extreme of declines in bonds but reviewing a core portfolio of corporate and government bonds across multiple maturities also reveals how difficult it was for the asset class.
  • The Bloomberg Aggregate Bond Index is widely considered the benchmark for a core taxable bond portfolio. Viewing the chart below illustrates the magnitude of the poor performance for bonds. With an inception date of 1976, the calendar year results are shown in the bars.  Over the last 46 years 2022 was only the 5th time the index had provided a negative total return.  By far, last year was the worst calendar year result at an astonishing -13%; before then the largest decline was 2.9% in 1994.                                                                                                                                                                                                                                                                           
  • Typically, for portfolio construction, bonds serve a ballast to stocks during times of volatility. Dating back to 1976 there was never a calendar year when both the S&P 500 and the U.S. Aggregate Bond Index were negative at the same time. Last year as a result of poor stock and historically bad bond market returns, a combination of the indices in a 60/40 portfolio led to very disappointing results as well.
  • Reviewing the chart below, there have been nine calendar years when a 60/40 portfolio generated negative returns. For 2022 this representative portfolio was down 16% which is the second worst year on record when compared to 2008 when the allocation resulted in a -19% return. However, a key difference was that in 2008 the bond market generated a positive return of almost 6% while again last year the bond market was historically awful with a -13%.
  • Financial markets are forward-looking mechanisms which means there are reasons for investors to be optimistic. Stock valuation multiples have decreased substantially which historically bodes well for future cumulative returns. What is likely a bigger positive are the interest rates investors can capture on quality bonds versus this time last year.  To begin 2022 the yield on the aggregate bond index was ~1.5% versus a ~4% yield as of January 9, 2023. This represents an income increase of roughly 160% which should ease the pressure on 60/40 portfolios to generate reasonable rates of return over the next market cycle at least.  We’re hopeful higher interest rates will reintroduce bonds as the traditional ballast to portfolio allocations after an extremely turbulent 2022.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

 

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