Everything is Getting Crushed
There has been absolutely nowhere to hide in financial markets in 2022. Stocks and bonds are getting crushed in the face of rising rates.
I decided to run the numbers and see how each of the major asset classes are holding up. Here are the numbers, total return for the 2022 year to date:
Yup, just as I suspected, everything is getting crushed. Unless of course you're holding 100% of your portfolio in oil and commodities. The chances of your doing that would be pretty low. Oil was trading at US$77 at the beginning of the year, rose all the way up to US$128 - that's a 66% increase in just two weeks. It then fell to US$98 or -24% within two weeks, up again to US$121 or +23% in one week, back down to US$98 or -19% over two weeks, and back up tp US$119 or 21% over a six week period. And all you did was get in at the beginning of the year and sit calmly in your seat - sure. My guess is that most long-term investors weren't there from the beginning. Or if they did, it was such a small portion of their portfolio that it won't be holding up the rest of the carnage*. Oh, and don't point to Gold, please, in real terms even gold is going backwards.
I then looked at the global stock markets to see how each of the country's stock market was holding up.
Brazil's stock market is well and truly in a league of its own as prices have soared for the country’s commodity exports—oil, iron ore, and foodstuffs. And unless you were invested in Portugal, Singapore, and Norway, stocks are down across the globe - from -0.3% to -18% in Sweden. Diversified index investors will no doubt have exposure to each of these countries, but it won't be enough to stop the bleeding.
Go to cash I hear you say? Well, even cash won't be doing you any good in real terms. No one knows when all of this will end. Are investors waiting for confirmation of a recession? Maybe. The trouble with this strategy is that you won't know we are/were in a recession until after the fact, and by then the market would have already run away. I feel like this is one of the truest tests of investor strategy and their nerve. What I know for sure are the following three facts:
The further asset prices go down, the higher future expected returns.
In the short-term the stock market is a voting machine, driven by emotion, but in the long run it is a weighing machine, driven by fundamentals.
The news will continue to worsen and meanwhile, the market will bottom and we will see a sticky rally - I just don't know when.
My colleague Matt Rigby and I talk more about this in last week's The Wide Lens podcast.
You can also listen to the podcast on Spotify or wherever else you listen to your podcasts.
* I'm talking about holding Oil futures/options, not shares in BHP - although commodity stocks have done well during this time as we have seen in Brazil's stock market.