The scatter plot below compares annual stock and bond returns since 1989. The dots represent the intersection of the S&P 500’s total return and the Bloomberg U.S. Bond Aggregate’s total return for each calendar year. The analysis highlights the challenging and unusual start to 2022. The ‘YTD 2022’ dot is the only dot in the lower left quadrant with stocks and bonds both declining more than -10% this year. If 2022 ended today, it would mark the S&P 500’s third worst year, and bond’s worst year, since 1989.
How unique is the current market environment? You will notice every year since 1989, except for 2022, is outside of the lower left quadrant. This indicates it is rare for both stocks and bonds to produce negative returns during a calendar year. Why are stocks and bonds declining together? The Federal Reserve is raising interest rates and shrinking its balance sheet by selling bonds, which pressures both stock and bond valuations. On the credit side, most bonds pay a fixed interest rate, which means bond prices must decline to offer a higher interest rate. On the equity side, interest rates represent the cost of money and are used as an input to value company shares. A higher interest rate typically decreases stock prices.
This year’s parallel stock and bond selloff highlights the importance of portfolio diversification not only across asset classes, but within asset classes. When you diversify your portfolio, you aim to invest in different asset classes that may react differently to the same event. The same principle applies within stocks and bonds. On a price return basis, S&P 500 Growth stocks are down -25.5% through May 11th, while S&P 500 Value stocks are only down -8.4%. In the corporate investment grade bond universe, Long-Duration (+10 Years) bonds are down -22.1% through May 11th on a price return basis, while Short-Duration (1-5 Years) bonds are only down -6.1%.
Important Notices & Disclaimer
The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.
The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.
The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results. Investing involves risk, including the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.
No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.
READERS SHOULD VERIFY ALL CLAIMS AND COMPLETE THEIR OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.
PFG Private Wealth Management, LLC is a registered investment advisor.