Planning matters

2022 First Half Market Review

2022 has been a bit a bumpy to say the least as we’ve seen in daily headlines. High inflation, rising interest rates and the Russia-Ukraine war are causing volatile markets. Today we look at the first half of 2022, define a bear market and share why it’s important to stay disciplined when investing during times of volatility.

On June 30, we marked the close of the first half of 2022, and United States equity returns were down -21.28% (source: Morningstar Index).  While markets have experienced a modest recovery from recent lows, stocks are officially and firmly in their second bear market in just over two years.

Bear markets are a normal, yet an uncomfortable part of investing. A bear market is defined as a 20% drop in value from its previous peak. Bear markets don’t officially end until it’s back up 20% from the most recent lows. The following chart shows all bear markets since 1948 and the associated time to a full recovery:

On average, bear markets have lasted just over one year, with the current bear market seven months old at present. Also, the time to a full recovery has taken 22 months on average.

Looking at the past six months, both stock and bond returns have been under pressure due to a host of factors: historically high inflation, a more aggressive Federal Reserve leading to rising interest rates, and the effects of the Russia-Ukraine war. While there are some silver linings, like low unemployment, near-record job openings and rising wages, these have not been enough to offset negative investor and consumer sentiment.

The below chart shows U.S. Equities were down by -16.85% in the second quarter and down -21.28% for the year through June 30, 2022. Our bias toward value stocks, which are down a more modest -7.31% through June, has helped reduce negative returns. International and Emerging market returns have been modestly less negative than domestic returns year-to-date.

Fixed Income investments declined by just over -10.23% through the end of June 2022 due to continued rising interest rates. Shorter maturity bonds across fixed income holdings have helped limit some downside in clients’ portfolios. Also, having some allocation to commodities continues to be a positive in portfolios despite the volatility in this space. Overall, the combination of negative equity and fixed income returns has been extremely challenging even for fully diversified investors thus far in 2022.

Investing During a Bear Market and Beyond

Stay disciplined. It’s a mantra when investing, especially during times of volatility; the current bear market is no exception. Having portfolios positioned appropriately, by reducing growth stock holdings and being overweighted in less expensive value equities and short duration bonds, has been somewhat helpful in weathering the current bear market.

Taking advantage of opportunities during a bear market is also part of a disciplined approach. Two things we’ve helped clients with this year include dollar cost averaging new money into the market at more reasonable valuations and harvesting losses in taxable accounts to offset current income or future taxable gains.

Bear markets eventually end. Many retail investors sold at or near the market lows in 2009 as reflected in mutual fund outflows of about $21 billion in March of that year. For some of those investors, the bear market never ended. According to Ned Davis research, half of the S&P 500’s strongest days over the past 20 years occurred during a bear market, which helped portfolios recover sooner. Missing even a small part of a recovery can hurt long-term results.

Investing is a longer-term endeavor. While the market is down this year, it may be helpful to remember that equity markets have had positive returns over the past three years even after reflecting the bear markets of 2020 and 2022. And while it is hard to see portfolio values go down, having a defined financial plan and disciplined investment approach can help navigate this bear market and ensure longer term goals are achieved.

If you have any questions, or would like to discuss your portfolio, please reach out to your Financial Planner.

Written By Lynn Snyder, CFA