To say that 2022 has been a rough ride for investors is such an understatement as to almost sound trite. The S&P 500 is well into bear market territory, and the traditional “safe haven” of bonds has done no better. The Wall Street Journal headlined “It’s the Worst Bond Market Since 1842.”1 What’s going on?
Inflation has continued to be far “stickier” than the transitory inflation the Federal Reserve predicted last fall. There are many reasons inflation has stuck around, but at the core it’s been persistent supply shortage, including labor supply.
We’ve seen the price jumps in day-to-day purchases, like gas and groceries. And while it’s painful to deal with, it pales in comparison to the devastation of runaway, or “hyperinflation”. As such, The Federal Reserve has made it clear they are committed to bringing inflation down, even if it means moderate or severe pain to the economy in the near-term. Our central bank, and those around the world, have been rapidly raising interest rates, causing much of that pain the markets are dealing with now.
Some good news is that the debate has begun about whether we’ve already seen peak inflation. Just this week, the head of the Federal Reserve Bank of Boston said she believed inflation is “near peaking and perhaps may have peaked already.”2 Whether she happens to be correct right now is not the point. The critical thing to remember is that these conditions are not permanent.
From a market standpoint, it’s also important to recognize that rising interest rates are often helpful to a portfolio in the long run. In the short-term, rising rates cause existing (lower-yielding) bonds, to be less attractive in the market versus new (higher-yielding) bonds. This puts downward pressure on existing bond prices. Within bond funds however, as those lower yielding bonds mature and get sold, they are replaced by higher interest paying bonds. We’ve kept our bond maturities shorter than average within your portfolio during the last several years of low interest rates. This has helped soften the blow of what’s been a terrible year for bonds so far. But more importantly, we remain well positioned to take advantage of higher rate opportunities as they present themselves.
The stock market is currently down, but that is part and parcel of long-term investing. We’ve seen this before…many times, in fact. Markets regularly go through cycles like these, averaging a bear market about every six years. These cycles can be devastating for undisciplined investors who emotionally put their shares up for sale at the worst possible time. But those who remain calm know that they can hold their shares and sell when the cycle favors them. And perhaps even buy shares while prices are low.
We cannot predict when the stock market will hit the bottom of the current cycle- no one can. However, we can remain invested. And not miss the returns achieved in a recovery, which has followed every market downturn in history-- often with outsized returns.