Summary
Investors continued to endure a roller coaster ride in the financial markets during the second quarter. Unfortunately, the roller coaster was broken because it went mostly down. During the second quarter, the S&P 500 Index fell just over 16%, the Dow declined over 11%, and the Nasdaq dropped over 22%. As of June 30th, these indices are down 20.6%, 15%, and 32%, respectively.
No one likes seeing their investments decrease in value. But it happens. In fact, it happens every year. Check out this chart, which shows annual returns and intra-year declines in the S&P 500 from 1980 to 2021:
Can't read this? Here's a link to a PDF of this chart.
First, note the solid gray bars, which show the return of the S&P 500 Index every year from 1980 to 2021. Second, check out the red dots and numbers below the gray bars. The red numbers indicate the intra-year drops - the largest market drops during the year. As you can see, it's not unusual to experience a decline every year. Does this mean the S&P 500 Index, along with other indices and investments, will end the year in positive territory? No, but it is possible.
Second Quarter 2022 Numbers
The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 or the Dow, fell just over 16% during the second quarter. Tack on the loss of just over 6% during the first quarter, and the average diversified U.S. stock fund is down over 22% as of June 30th.
International stocks also declined, with the average diversified international stock fund down nearly 14% during the second quarter. Adding the loss from the first quarter, 8%, means the average international stock fund is also down over 22% for the first half of the year.
Investors pulled money from both categories, over $17 billion and $25 billion, respectively.
Investors, perhaps realizing bonds weren't a safe haven, pulled nearly $146 billion out of bond funds during the second quarter. The average intermediate-term bond fund lost a little over 5.0% during the second quarter. When we add the first quarter loss, about 6%, that leaves the average intermediate-term bond fund down over 11% as of June 30th.
Perhaps the silver lining here, and this is really a stretch, is the loss in bond funds didn't match the loss of 22% found in both U.S. and international stock funds. I'm trying to be optimistic!
Returns By Broad Category
Can't read this? Here's a link to a PDF of this chart.
The chart above provides a high-level view of how the broad asset categories have fared annually from 2007 - 2021 and the first half of 2022 (the column labeled "YTD"). The category titled "Asset Alloc." refers to a 60% stock, 40% bond portfolio.
I love this chart and always look forward to seeing the updated version. Two takeaways:
Notice any patterns? If you answered "yes", we need to talk because your brain operates on a different level than mine. It's impossible to consistently predict which categories will perform best from year-to-year or month-to-month.
This chart is Exhibit A for why it's prudent to build diversified portfolios. Sadly, diversification means you're always having to say you're sorry because it's rare for every category to produce positive returns.
As far as the chart goes, the only "winners" for the first half of 2022 are commodities and cash.
Final Thoughts
Last quarter, I wrote, "If there's one thing investors hate, it's uncertainty." Well, that statement is still true. Investors continue to grapple with the following questions:
When will inflation reverse course? Spoiler: Not yet. The U.S. inflation rate was 9.1% in June, the highest on record since November of 1981.
How much will the Fed have to raise interest rates to get inflation under control? It depends on the monthly inflation numbers. I expect rate increases to become smaller, and eventually decline, once monthly inflation number shows a consistent downward trend.
When will problems with the supply chain end? September 17th, 2022. Just kidding. No one knows, but seems as if the situation is beginning to improve, especially now that COVID-related disruptions are on the decline.
What's the deal with Elon Musk? I have no idea.
Rather than dwell on these questions, and the many other uncertainties facing investors today, I recommend focusing on things you can control:
Stick to your financial plan. If you're a client, you already have a financial plan in place - one that takes downturns into consideration. If you're still concerned, or if something in your life has changed, you can always contact me. Not a client? Feel free to schedule an initial consultation if you want to talk about creating a financial plan.
Don't check your portfolio daily, weekly, or even monthly. Investing is a marathon, not a sprint.
Steer clear of financial "news" from sources like CNBC.
Have surplus cash? If so, take advantage of the decline in financial markets by investing while things are on sale.
