2022 has been a difficult year so far in the stock and bond markets, and that's likely to get worse before it gets better. Although we are not surprised with the decline in the market, we did not believe it would happen as early in the year as it has. With this said, we still feel there is a higher probability that the equity markets finish higher at the end of 2022 than they are now. Regarding the bond market, we feel that other than shorter-term maturity fixed income securities, most of the bad news has been priced in.
Surprisingly, this stock market may be more normal than you think. As illustrated below, the market volatility we've experienced this year matches the 40+ year annual average:
The gray bars above represent the S&P 500's positive or negative return for each year since 1980. The red dots represent the market volatility during each respective year. On average, the maximum intra-year decline each year since 1980 has been -14%. The S&P 500's intra-year drawdown as of Friday is also -14%.
We do not mean to suggest we've seen this exact investment environment before. This combination of downside risks is unique and significant: Supply chain issues, persistent inflation, an increasingly hawkish federal reserve, a slowing economy, and the war in Ukraine. With that said, strong demand and balance sheets at the consumer and business levels should not be overlooked.
While this market environment is anything but typical, consider that every market decline in history has been scary and had its share of problems. As stock market investors, we all have the tendency to forget how frightening past market declines have been in real time. The stock market has survived world wars, geopolitical conflicts, periods of unemployment and inflation, natural disasters, major recessions, the global financial crisis, and most recently the pandemic. Despite those very real problems, the US stock market has proven its resiliency each time.
As we see above, the S&P 500's annual returns have been positive in 32 of the last 42 years despite fear and chaos along the way. We expected this year to be volatile and we would anticipate more volatility ahead. In times of uncertainty, it can be wise to use history as a guide and keep a level head. As always, give us a call if we can help answer any questions you have about how this market environment affects your financial situation.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.