There is generally only one free lunch in the investment world and that is diversification. Unfortunately, plain vanilla diversification has not worked this year as both stocks and bonds have seen historic declines. The S&P 500 posted the worst first half since 1970 (down 20%), and the 4th worst start to the year (1932 & 1962) in history. Bonds, most investors safe investment, were down 10.4%, the largest decline to start a year since data began being tracked in 1981.
We hope everyone and their families are healthy and safe and enjoying the start to summer. The first half of 2022 has certainly been a rough start to the year for both markets and the global economy: facing headwinds from an ongoing war in Ukraine/Russia, high and unpredictable inflation, rising interest rates and continued supply chain disruptions. While it was our belief that markets were due for a pullback and the confluence of these issues would result in a volatile market, we did not expect for it to happen this broadly and quickly.
After a year in which the S&P 500 advanced by more than 28%, the first quarter saw major volatility with the S&P 500 ending the first quarter of 2022 down 4.6%. At the lowest point, the 500 largest companies were down 12.5% on March 8th, but rallied nicely through the end of the month. Growth stocks were particularly hard hit with the Nasdaq down over 20% at its low. The first Fed rate hike since 2018, the biggest conflict in Europe since WWII and the highest level of inflation in 40 years all weighed on investor confidence.
Russia’s decision to invade Ukraine has dominated the headlines in recent weeks. We are saddened to see the impact on the innocent lives involved in this crisis. This is obviously a very fluid situation, and we are evaluating all developments closely.
Stocks could be volatile for a while, but the impact to stocks from geopolitical events historically has tended to be short-lived.
Despite some end of year volatility, major indices rallied during the 4th quarter, with the S&P 500 up 11% and the Dow up 8%. For the full year, the S&P 500 was once again the best performer of the major world indices, returning 26.9% and recording 70 new record highs, the most since 1955. This was the third straight year of double-digit returns. The markets were once again driven by earnings growth. Heading into 2021, the market consensus was for year over year earnings growth of 22%. Incredibly, actual earnings grew 65% year over year, the largest upward revision since this data has been tracked starting in 1984. Record inflows into equity funds and a resurgence in stock buybacks also helped major U.S. indices.