By Tom Burnett CFA
During the first six months of 2022, both the bond and the stock markets are off to a disappointing start. Using the data from the WSJ.com website with February 16 closing prices, investors can see that positive performance this year may be difficult to obtain. The primary hurdle is an aggressive Federal Reserve policy based on rising interest rates put in place to slow the economy and rein in the inflationary pressures that have now reached 40-year highs (at the consumer level).
Apart from the energy/commodity sector, performance in 2022 is off to a very rough start. The Bloomberg Commodity Index is up 12.6% this year, led by the energy complex. Natural gas and crude oil have risen 26.5% and 24.5% respectively. Bonds and stocks, however, have struggled to perform. Interest rates are rising and most observers expect that trend to continue as the Fed begins to tighten. The 10-year Treasury yield has risen to 2.04% from 1.51% at the end of 2021. Similarly, the 30-year Treasury yield has gone from 1.92% at year end to over 2.30% currently.
The equity market performance has been dismal. The S/P 500 Index is down 6.1% this year. Small stocks are not doing much better, as the S/P 600 Index is down 5.2%. The technology heavy NASDAQ 100 Index is down just over 10% this year. Globally, performance is not much better. In Europe, the STOXX Euro 600 is down 4.1%, led by the DAX in Germany which is down by 3.2%. In Asia, the Nikkei-Tokyo Index is down 4.2% along with a decline of 4.8% in China’s Shanghai market.
Bond investors have also suffered a difficult start to the year. The Index of total U.S. bond markets is down 4.2%. The High-Yield sector is down 4.5%. The global markets are also suffering, especially the Emerging Markets where the WSJ Index is down 5.2%. The worst sector, however, is the 20+year Treasury Index which is down 8.4% in 2022. Even the relatively safer bonds in the Investment Grade Index have declined in value, off 7.0% this year.
Investors must learn to live with a rising interest rate environment, since the Federal Reserve has made it clear that fighting inflation is its number one priority.
Tom Burnett CFA is Director of Research