One major caveat and what we as investors aren’t accustomed to, is bonds falling more than stocks. Especially during an equity sell-off. As you can see below, if 2022 ended today, it would be the worst total return for the Bloomberg Barclays Agg index since its inception. The Bloomberg Barclays Agg consists of intermediate-term bonds and is widely used as a proxy for the “bond market”. As it stands today, the “Agg” is down more than the S&P 500.
Historically, one of the reasons bonds have been used inside client portfolios is due to their inverse relationship with equities during market sell-offs. The thinking is that when equities and risk assets sell off, money will flow into these safe-haven bonds, which would prop up their performance during these periods. To better show this, I went back and pulled the worst 5 calendar years for the S&P 500 dating back to 1977. As you can see, other than the beginning of 2022, the BBG bond index provided tremendous value during these periods of equity declines.
This is what makes this period in markets so hard to understand for many investors. Over the past 40 years, interest rates have continually dropped until it wasn’t possible for them to drop any further. With the recent spike in inflation and the Federal Reserve announcing that they will begin to unwind their balance sheet of bonds, interest (the cost of money) has started to reflate. Unfortunately for bonds, when interest rates increase, the value of present-day bonds decreases. A gentle reminder that money isn’t actually free and there is risk in all investments.
With all of that being said, we are not even 4 months into the year. Much can change over the next 7 to 8 months. If we remember back just a few years ago to March of 2020, equity indexes and bonds had their worst start to a calendar year in history, and ultimately both ended up being positive for the year. From a positioning perspective, we remain neutral in our equity weighting and have started to add a little duration to portfolios. As always please don’t hesitate to reach out with any questions at all.