Market Musings 030123:
A better starting point for 2023?
While 2022 has been difficult enough for investors predominantly invested in stocks and shares, spare a thought for so-called conservative investors who were primarily invested in supposedly less volatile bonds.
2022 Bond Breakdown
On the back of a resurgence in long-dormant inflation, US investors in long-term (20 years and longer) US government Treasury bonds lost nearly 30% in value over 2022, even after accounting for interest payments (coupons). Those investing in a US total bond index lost nearly 14% over 2022, the worst such annual return for US government bonds in 100 years.
The worst annual US bond return in 100 years
Source: NYU Stern
In the UK, UK government bonds (gilts) have been equally awful for conservative investors, with a typical UK gilt ETF losing 27% of its value (including income) over the year.
2022 has now wiped out more than all of the cumulative positive performance of US and UK government bonds over the last 5 years (since the start of 2018).
It is thus hardly surprising that the combination of poor stock and bond performance combined hsa resulted in the worst performance for a US balanced portfolio (comprised 60% of US stocks and 40% of US bonds) since 1937!
The worst year since 1937 for a US balanced investor
Source: Charlie Bilello via Twitter
Thanks to the more resilient performance of the UK’s FTSE 100 index (indirectly due in part to the weakness of sterling), a similarly composed UK balanced portfolio of 60% FTSE 100 stocks and 40% UK gilts would have returned -11% over 2022, due almost entirely to the sharp drop in bond prices.
A longer term perspective looks healthier
But it pays to look at what preceded a painful 2022 for investors. 2019 to 2021 saw three consecutive years of healthy double-digit gains for US balanced portfolios which had resulted in a cumulative return of +64% for the 3 years to the end of 2021. So even including 2022’s setback, the cumulative 4-year return from 2019 to end-2022 was +35%, equivalent to a compound annual average return of nearly 8% per year.
A UK-based investor…
