August 01, 2022

Let’s just be frank – the first six months of this year were awful for most stock and bonds investors.

The S&P 500 has lost more than 20% of its value so far this year. That puts us in a bear market, which we haven’t truly experienced since the financial crisis of 2007-09.

As for bonds, yields have risen dramatically thus far in 2022, but that comes at the expense of their prices, due to the inverse relationship between bond yields and bond prices. With bond prices dropping so much, the asset class has proven NOT to be a haven for investors, as has been its traditional role.

Not surprisingly, the traditional 60% stock/40% bond portfolio got hammered in the first half of the year. In fact, we may have just survived one of the worst six-month periods on record for stocks and bonds collectively. Six-month returns for the 60/40 portfolio are in the bottom 2% of rolling returns going back to 1926.

That means 98% of the time returns have been better than what just occurred!

It was also just the fourth time over the past 100 years that stocks and bonds were down at the same time for two quarters in a row. The last time U.S. stocks and intermediate-term bonds were both down two quarters in a row occurred in the first few months of 1974.

Inflation roared back then too, just like now. So, real returns during these high inflationary periods are even worse.

What happens going forward? As always, nobody knows for sure. A third consecutive quarter of stock and bond declines seems unlikely – it’s only happened once in 100 years, during the last nine months of 1931 – but anything is possible nowadays.