Earlier this year I looked at the worst years ever for the US stock market.
Well, things didn’t get much better from there.
Here is the updated list:
The 18.1% drop last year was the seventh-worst loss since the 1920s.1
The bond market also had one of the worst years in its history.
It was by far the worst year ever for the Bloomberg Aggregate Bond Market Index, which dates back to 1976.
In the 40+ years of calendar year returns prior to 2022, there were only four default years:
- 1994 -2.9%
- 2013 -2.0%
- 2021 -1.5%
- 1999 -0.8%
The total return of -13% in 2022 was by far the worst loss ever for this entire bond market index.
Since the 1920s, 10-year US Treasuries have only recorded a double-digit calendar year loss. That was down from 11.1% in 2009. Now we have two.
The benchmark US Treasury bond lost more than 15% in 2022, making it the worst year for bonds on record.
All in all, a 60/40 portfolio of U.S. stocks and bonds is down more than 16% in 2022. With both stocks and bonds falling sharply, this was the third-worst year ever for a diversified portfolio:
There’s no glossing over it – if you had any money invested in the financial markets, 2022 was a tough year, possibly one of the worst we as investors will ever see.
I try to view such losses as sunk costs. They have already happened. You can’t go back and change things now.
All that matters is what happens from here, not what happened in the past.
The beatings could continue until morale improves. There’s nothing to say that markets will suddenly get better just because it’s a new year.
If you’re the kind of person who likes to look for a silver lining in these things, there’s some good news for investors going forward.
The losses from 2022 have brought additional returns to your portfolio.
The global stock market now has a dividend yield of around 2.2%. Yields on short to medium term bonds are now in the 4-5% range.
That’s enough for a return of more than 3% on a diversified portfolio of stocks and bonds.
In 2022, that yield was closer to 1.5%. At the start of 2021, it was closer to 1%.
Losses aren’t fun, but falling markets lead to higher dividend yields, higher bond yields, and lower valuations.
Expected returns are now higher.
I’m unable to predict the timing or magnitude of these higher expected returns, but as far as returns go, there’s a much larger cushion for investors now than there has been in years.
The other good news is that whenever we’ve had bad times in the past, they’ve proven to be wonderful opportunities for long-term investors.
There are no guarantees, but investors should be better off in the future as long as you have enough patience and perspective.
Why should you invest in the stock market?
1I am protecting The Great Inflation for 2022 until someone finds a better name. Perhaps the Fed’s revenge?