Market Update
We live in a time of heightened uncertainty. Inflation rate is at a four-decade high. The Federal Reserve strong response with higher interest rate will slow the economy. There is a substantial probability that a recession could start in 2022 or 2023. U.S. stocks recently entered a bear market (down more than 20%). The vast majority of stocks and bonds funds and ETF are down this year. A globally diversified portfolio with 60% in global stocks and 40% in bonds is down around 16% for the first half of the year. The biggest full-year decline with data going back to 1977 was -20% in 2008 for a portfolio with 60% in U.S. stocks and 40% in bonds. The previous market update is available
here.
2022 first half performance: VT is the Vanguard Total World Stocks ETF (down 21%), and BND the Vanguard Total Bond ETF (down 11%).
U.S. stocks are down 21% which is the worst first half of a year since 1970.
As of June 17, 2022, we saw the worst start since the Great Depression in around 100 years. Often, after a poor start, stocks were up during the rest of the year until year end (YE).
The performance of U.S. stocks in real terms (inflation adjusted) is the worst since 1872.
Investors in stocks are used to their volatility (down around 50% in 2001-2002 and 2008, down 35% in March 2020…). Many times, stocks were down more than 30%:
As you can see, many times following a bear market (stocks down 20%), the performance of stocks were better 3, 6 or 12 months later.
On average, a bear market lasted for 11 months, the average decline was 30%, and it took a year and a half to recover.
While bear markets are painful, if you stay invested, you can later enjoy great stock performance on the long term:
Both, U.S. bonds and U.S. stocks are currently experiencing very poor performance as you can see from the drawdowns charts below. For the first time in 40 years, you can now see very poor performance of bonds. The U.S. Aggregate Bond index lost 11% during the first half of 2022, its worst start to a year in history.
So far in 2022, stocks and bonds are both down over 10%, something we've never seen.
The Global Aggregate Bond index is down 20% since January 2021. World government bonds are on course for the worst year since 1895.
Although safer investments can calm our anxiety when the market’s tumbling, choosing safety can be a mistake for long-term investors. The graph below illustrates how a hypothetical “reactionary” investor, who made their portfolio safe when the market dropped 30%, but missed gains time and time again during market recoveries. The reactionary investor traded long-term results for short-term comfort. (Source: Hartford).
Conclusion
It is important to
stay invested and to focus on the long term. As you can see below, the average investor who is trying to time the market underperformed. History shows that long-term investors who stayed the course through crises and didn’t lose sight of their financial goals have been rewarded.
