There is no doubting that 2022 continues to be a challenging year; the war between Russia and the Ukraine is ongoing, inflationary pressures are being felt worldwide and interest rates around the globe are now commonplace.
The economic impact of these issues are being played out in global markets, with equity markets in September clocking up their worst performance since March 2020 when Covid-19 wreaked havoc on the world.
But perhaps the most perplexing challenge of 2022 is that bonds – traditionally a defensive asset – have provided no safe haven for investors. As you can see below, 10-year treasury bonds in the US are on track for their worst year ever, currently down 16.7% for 2022.
S&P 500, US 10-Year Treasury, and 60/40 Portfolio (Total Returns, 1928-2022)
Source material: Ophir Asset Management
The above table also details annual returns dating back to 1928 for a 60/40 portfolio comprising 60% exposure to the US Market (S&P 500) and 40% exposure to US Bonds (10 year Treasury Bonds), and the individual performance of these sectors.
Whilst a diversified Balanced portfolio will hold exposure to other growth and defensive markets around the world, this US data does help to put some perspective around the economic challenges of 2022. We have to go back to 1931 and the Great Depression to see a worse year for a Balanced US portfolio!
But now some good news; from 1928 through to 2022 (a total of 95 years!), there have only been 4 other years (highlighted in yellow) where both US shares and bonds have underperformed at the same time. Taking 2022 into account, this means that in nearly 95% of cases, bonds have proven their diversifying power, helping to offset share market falls. Growth and Defensive assets performing in a counter-cyclical fashion is the bedrock on which modern portfolio theory is built. But with all asset classes down at the same time in 2022, it is fair to say that modern portfolio theory has hit a snag – this wasn’t meant to happen in theory. But like the quote from Yogi Berra “In theory there is no difference between theory and practice. In practice there is”.
So where to from here? What do we need to do? The simple answer is hold. Markets have shown time and time again the folly of investment decisions based on emotion and market timing, transferring wealth from impatient people to patient people. Now is not the time to lose faith in your longer term strategy.
With markets down our future expectations of returns inevitably increase as too does our expectation that the relationship between growth and defensive assets will normalise once more. Markets will rebound, and if history is anything to go by, it will happen suddenly and strongly.
So be patient and don’t let the poor investor sentiment and media noise of today see you miss out on the inevitable recovery!