The stock market notched a fittingly downbeat end to its worst year since 2008 — and investors are nervous about the potential for another year of pain.
State of play: After dropping 0.3% on the final trading session of the year Friday, the S&P 500 finished 2022 down 19.4%.
- It's the seventh worst year for the index on records stretching back to 1929, according to FactSet data.
- That means 2022 ranks with the ugliest years of the Great Depression, the 2008 financial crisis and the dot com bust in the annals of market massacres.
The intrigue: What makes this year even more painful for investors is the fact that bonds — which traditionally do well when the stock market suffers, and can cushion the blow — were also hammered in 2022.
- The Bloomberg U.S. Aggregate — a broad benchmark for the American bond market — is down more than 12% in 2022, the worst showing in the history of the index. (Data goes back to the late 1970s.)
The big picture: The simultaneous collapse of bond and stock prices can both be traced back to the same sources — inflation and the Fed.
- And with the Fed expected to keep raising rates in 2023, investors fear the bad times may continue.
How it works: In 2021 and 2022, prices increased at the fastest pace in 40 years, forcing the Fed respond with the sharpest rise in interest rates since the early 1980s.
- Rising interest rates tend to hammer both the prices of stocks — especially highly valued tech shares — and bonds.
- Thus, 2022 was a perfect cocktail for financial pain.
Yes, but: Before you grow too despondent over the state of your 401(k), keep things in perspective.
- Remember, before 2022 came 2020 and 2021 — years in which the S&P 500 was up 16% and 27%, respectively.
- Since the end of 2019, stocks are still up about 19% — meaning that, for all the wild swings of the last three years, investors have basically seen a three-year period of slightly below average performance. (The S&P is up about 7% in an average year, according to FactSet numbers.)
The bottom line: It was an ugly year for the ages. But over a slightly longer horizon, things don't seem all that bad.
