How Unusual is 2022?

October 20, 2022

As many of us in the financial services industry repeat ad nauseam, bear markets are a normal part of being an investor. But each bear market can be very different in its evolution and its impact on investor psyche.

Maybe the most unique element of the current one is that it’s happening at the same time as a large sell-off in the bond market. The risk mitigation historically offered by a balanced portfolio of stocks and bonds has therefore been much more muted in 2022.

Exactly how unusual is the current experience for investors? According to a recent analysis from BlackRock,¹ the answer is “very unusual” in terms of both magnitude and persistence.

Relative to magnitude, since 1926, only three calendar years have witnessed a worse opening nine months for U.S. stocks than this one. It’s even more acute on the bond side. 2022 is the single worst nine-month start for bonds in the entire 97-year measurement period.

In terms of persistence, both U.S. stocks and U.S. bonds have produced a negative total return in each of the first three quarters of 2022. The last time that occurred was 1931. In that year, Babe Ruth and Lou Gehrig combined to hit 92 home runs for the Yankees, Boris Karloff starred in the original Frankenstein movie,² and Al Capone was put away for tax evasion.

For those of us who are climate-focused with our investments, the aggravation has been magnified by the fact that traditional energy is the only major U.S. sector to produce a positive return so far this year. That may not seem unexpected given the current geopolitical and inflation backdrop. But the fact that energy has outperformed the next closest sector (consumer staples) by an incredible 60% certainly is not normal.

The intent here is not to depress you with nasty statistics. It’s more to provide context that what we are going through this year is very unusual. This market has felt frustrating and weird because it is, in fact, frustrating and weird.

There are silver linings, however. First, keep in mind that if U.S. stocks don’t eventually recover and achieve new highs, it will be the first time in history that they don’t. Unless you believe the U.S. economy is fundamentally and permanently broken, and that the companies that drive the economy will stop growing as a result, owning pieces of those companies at cheaper prices should still be a path to investing success over time.

With yields on 1 to 3 year Treasury securities well above 4%, bonds now also provide a much larger income cushion than they did at the start of this year. And the S&P Global Clean Energy index, while down along with just about everything else, has actually outperformed the overall U.S. stock market since the end of the first quarter.

It’s impossible to know exactly when the worst will be behind us. But the clouds have always eventually lifted, and there is no reason to think it will be different this time. Happy Halloween.

1. “Student of the Market”, BlackRock, October 2022.
2. OK, technically it was not the “original” version. Thomas Edison produced a 16-minute silent version in 1910.