As we close out 2022, markets are limping to the finish line, and what a year it has been. Bonds have been hammered, stocks have been hammered, and to a great extent there has been nowhere to hide. On the bond side, short duration helped, but bonds did not play the safe-haven role they typically do when equity markets decline.
Cash was seemingly a safe haven and cash (money markets) is now yielding 4%, but that was in the face of 8% inflation. Target-date funds -- those funds that attempt to align your retirement date with a more conservative portfolio allocation as that date approaches -- had their own issues in 2022, and this is not the first time. During the 2008 market meltdown, some funds with very close target years were over-allocated to stocks and affected pre-retirees were shocked to see the damage to what they believed to be conservative allocations. This time around, it was the intermediate bond durations in these portfolios that did a lot of damage.
I am still surprised at the small spread between the performance of large, small and microcap stocks. The S&P 500 (down 18.5%) is not as far ahead of the Russell 2000 Index (down 21.1%) or the Russell Microcap Index (down 23.6%) as I might have expected under the circumstances.
The big question on all our minds is, "What will happen next year?" I wish I knew, but I don't. I suspect it will be a positive year for the markets, though. And that's in the face of a worsening economy; that may sound idiotic. But if you believe that markets are forward looking, it is certainly possible.
The last time the S&P 500 fell two consecutive years was 2001 (down 12%) and 2002 (down 22%), and that came on top of a down year in 2000 (down 9%). Before that, you need to go all the way back to 1973 (down 14%) and 1974 (down 26%).
One of the wild cards could be additional self-inflicted wounds caused by poorly thought-out government policies, which brought on a lot of the pain this year. (If you have not read Ayn Rand's "Atlas Shrugged," I suggest that you do so in the New Year; published in 1957, it is an eye opener and similarities to where we are and may be heading abound.)
Bonds should also do better in 2023 as the Fed likely has done most of its heaving lifting in 2022, pushing the fed funds rate from zero to 4.25% over a nine-month period. I don't believe it has the stomach to do much more than an additional 1% in 2023, but we'll see.
Good riddance, 2022!
