Mana’s 2022 Market Review
Asset Class Performance
Over the past year, the only positive performing asset classes were commodities and T-Bills. Global stocks fell between 18-20%. Real estate was the worst performing asset class at -25%, in stark contrast to the year before where it was up 38%.
During Q4 2022, both stocks and bonds staged a recovery. International developed market stocks led, growing by 14.3%, compared to the S&P 500 which was up 7.6%.
4Q22 Economic & Market Review, Russell Investments
Extensive research has shown that, if you have a diversified portfolio, a whopping 88% of your experience (the volatility you encounter and the returns you earn) can be traced back to your asset allocation. - Vanguard.
Investment Commentary + Outlook
2022 was both a year of highs and lows for the global markets. Though markets experienced a pronounced rebound in the 4th quarter, it wasn’t enough to end the year with positive total returns. Both U.S. bonds and U.S. stocks posted negative returns in 2022, an occurrence that’s happened only once since 1970 as the markets processed a year filled with a rapidly changing global economy.
Inflation reached a 40-year high in the US, and the Federal Reserve pursued the most restrictive monetary policy in 40 years, using a series of interest rate increases to combat rising prices; similar actions were taken across many of the world’s central banks. Russia’s invasion of Ukraine in February brought uncertainty about political stability and energy prices, among other worries. A midterm US election shifted more power to Republicans but left Democrats in a stronger position than some had expected.
Dividend and Value Trend Persists
As we mentioned before, the S&P 500 grew by 7.6% in the fourth quarter. However, as you can see below, many factors within the S&P 500 actually did significantly better. All factors outside of growth were up over 10%, but growth stocks drove down the average as they returned only 1.45% during Q4.
Higher yields could improve total return in bonds
Since the 1920s, the 10 year Treasury bond has declined by more than 10% only once - this was in 2009 during the financial crisis when Treasury bonds lost 11%. 2022 marked the second year since 1920 that this was accomplished, losing a whopping 18%.
As interest rates rise, bond prices fall, causing some short term pain. However, unlike stocks, that pain is only temporary. If you intend on owning the bond until maturity, you will get your entire investment back. The route in bond prices also presents an opportunity for investors getting into the bond market today: higher yields.
Bond investors haven’t been compensated to take increased risk by going out longer on the yield curve. This chart shows the yield based on various maturities of treasury bonds. As you can see, the highest level of compensation comes with bonds that mature within the next year.
With the Fed actively involved in the interest rate policy, making changes on a regular basis to the target Fed Funds Rate, changes in interest rates and the impact on bonds is an important factor we are monitoring. With higher rates of interest, bonds are now generating a higher yield, which is positive for bond investors. However, the changes in interest rates can have an impact on the overall expected return of bonds, which are shown in this chart by Russell Investments below.
Municipal bonds for high income earners
In the chart above, you might wonder why municipal bond yield trails every other bond asset class. The reason is because municipal bonds are quoted in an after-tax yield. The majority of the municipal bond market is non-taxable for federal taxes, and if you are investing in a municipal bond within your state (e.g. a California resident investing in California non-taxable municipal bonds), you earn interest tax free at the state level as well.
If you’re in the highest income tax bracket and desiring a lower volatility investment, municipal bonds could be an attractive option within your overall strategy.
Source: J.P. Morgan Asset Management, (Left) Bloomberg, FactSet, Federal Reserve; (Right) Census Bureau, Congressional Budget Office (CBO). State and local debt are based on the Census Bureau’s Annual Survey of State and Local Government Finances. Municipal tax-equivalent yield assumes a top-income tax bracket rate of 37% plus a Medicare tax rate of 3.8% for a total tax rate of 40.8%. Guide to the Markets – U.S. Data are as of December 31, 2022.
To the right is a chart which highlights the attractiveness of municipal debt relative to government debt. The chart depicts the municipal bond yield curve on a tax-equivalent basis, relative to the nominal US Treasury yield curve.
The X-axis represents bond maturity, ranging from 3m to 30 years.
The Y-axis shows the tax-equivalent yield, calculated using a tax rate of 40.8% (top income tax bracket of 37% + 3.8% net investment income tax), but does not take into account state taxes. Adding state taxes would only further the spread on municipal debt vs. treasuries.
Global market leadership rotates
The case for investing outside of the United States lies with the simple fact that almost half of the equity market opportunity is found outside of the United States. In 2022, non-U.S. stocks outperformed U.S. stocks for the first time since 2017. In the below chart produced by JP Morgan, this isn’t the first time this has happened. Over the past fifty years, market leadership of U.S. stock markets vs international markets have rotated through several regime changes. While recent years have been favorable to U.S. stocks, history has shown that global market leadership has - and will likely continue to - rotate.
Source: FactSet, MSCI, J.P. Morgan Asset Management. *Cycles of outperformance include a qualitative component to determine turning points in leadership. Guide to the Markets – U.S. Data are as of December 31, 2022.
Looking ahead to 2023
After a year with pronounced negative returns globally, we’ve seen the future expectations of all asset classes increase dramatically. One firm we follow - JP Morgan - forecasted an annual return for a 60/40 stock-bond portfolio over the next 10-15 years of 4.30% at the beginning in 2022. By the start of this year, this long term forecast jumped to 7.20%. The main drivers were: 1) now that rates have increased, bond returns are a plausible source of income, and 2) with huge declines in the stock market both in terms of valuations and earnings, future expected growth is higher.
Ultimately, though the 7.20% return appears attractive, we still urge investors to remember that these returns can only truly be achieved if you are invested in this strategy over the long term (we’re talking 10+ years). We’ll leave you with the chart below, which shows the range of stock, bond and a 50/50 blend of stocks and bonds fares over time. Even with the stock market downturns in recent memory (2002, 2008, and now 2022), the longer you stay in the market, the greater likelihood you are to be rewarded.
Source: JP Morgan Guide to the Markets Q4 2022. Source: Bloomberg, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management. Returns shown are based on calendar year returns from 1950 to 2021. Stocks represent the S&P 500 Shiller Composite and Bonds represent Strategas/Ibbotson for periods from 1950 to 2010 and Bloomberg Aggregate thereafter. Growth of $100,000 is based on annual average total returns from 1950 to 2022. Guide to the Markets – U.S. Data are as of December 31, 2022.
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Stephanie Bucko and Cristina Livadary are fee-only financial planners based in Los Angeles, California. Stephanie is the Chief Investment Officer and Cristina is the Chief Executive Officer at Mana Financial Life Design (FLD). Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. As fee-only fiduciaries and independent financial advisors, Stephanie and Cristina never receive commission of any kind. Stephanie and Cristina are legally bound by their certifications to provide unbiased and trustworthy financial advice.