Anyway you look at it, 2022 was a tough year for investors. It isn’t so much that stocks lost money (not that unusual). Or even that bonds closed in the red (more unusual, but not unheard of). It’s more that they both went down at the same time. The chart below from the Financial Times puts this into perspective. The last twelve months was the worst combination of both stock and bond returns going back to 1871 based on their analysis.
Now of course, any sort of index data before WWII gets pretty sketchy. But you have to admire the historical scope!!
We are also going to see a lot of the following types of tables in the next few weeks. Basically, the only asset classes that made money in 2022 were commodities and cash.
What this all meant in real terms is that the typical 60/40 portfolio posted its worst performance since 2008.
A Few Surprises in 2022
Going into 2022, markets and investors clearly weren’t prepared for how high inflation jumped.
In retrospect, we all underestimated how aggressive the Fed would be in trying to put the inflation genie back into the bottle. This latest rate hike cycle is unlike anything we’ve seen before (just like the monetary and fiscal response to COVID was also unlike anything we’d seen before).
The other major surprise for 2022 was obviously Russia’s invasion of Ukraine in February. Oil and gasoline prices shot higher in the immediate aftermath of the war, only to fully retrace their run by year’s end.
The Year of the Crypto Fraud
Now maybe the turmoil in the crypto space wasn’t a total surprise, but it certainly unraveled quicker than most expected. Many crypto tokens managed to go to zero in 2022, and Bitcoin lost a cool -64% for the year.
Plunging prices led to an all too familiar chain of events. In July, a smaller crypto custodian went under….
…then a much larger player, Celsius, went under and Tether went to $0…
…the now infamous Sam Bankman-Fried and FTX stepped in to scoop up the assets of Voyager in September…
…but less than two months later FTX went under in what will probably go down as one of the biggest frauds in history…..
…and FTX’s implosion wiped out thousands of investors and depositors. It also took down BlockFi…
…which all on its own has about 100K creditors and close to 500K clients.
COVID Surprises
Finally, in 2022 COVID mattered less and less for much of the world.
Case counts dropped dramatically, life got back to normal, people started traveling again, and stands at the World Cup were packed (despite the lack of beer).
Maybe the bigger surprise is how China has handled the situation. They have gone from stringent lockdowns to a dramatic reopening in the matter of days. And while the official numbers show few or no cases (depending on the source)….
…case counts are almost certainly skyrocketing.
So, what will the surprise be in 2023? Will China clamp down again? Or are they too far along the re-reopening path? If China gets back to business in 2023, what will that mean from global growth, inflation, and commodity prices?
(Other) Charts We Found Interesting
- The bad news is that stocks had the fewest positive days over the past year in more than a decade. The good news – times like this are fleeting.
- Another surprise in 2022 was the Bank of Japan abandoning their yield curve control policy. They were capping 10-year bond yields at 0.25%. But in a move that surprised most observers, they increased the cap to 0.5%. Global bond yields increased as a result.
- Want an argument for why there is better value in the bond market today? A year ago you paid the government roughly 1% a year to buy an inflation protected bond. Today you make roughly 1.5% a year.
- It’s the same story globally. Negative yielding bonds have all but disappeared.
- COVID restrictions hammered China’s demand for oil. Will reopening lead to renewed demand?
- There’s a lot going on in this table, but basically, the winners of the last cycle don’t win during the next cycle.
Happy new year everyone!!
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