With bonds down close to 10% for the year and the S&P 500 nearing “bear market” territory (20% drop) just last week, there are plenty of questions arising on the investment front. Here are a few of the most common concerns:
Q) Why am I losing money in bonds? Aren’t they supposed to be less risky?
According to Jason Zweig of the Wall Street Journal, the year-to-date loss for bonds would rank as the worst annual performance for the broad bond market since 1842. So… it’s been pretty rough! Nonetheless, as of last week bonds were down only half as much as stocks year-to-date. Over the past month, bonds have fallen about 1.3% while stocks dropped over 11%.
Bonds have reduced overall portfolio losses, just not nearly as much as we all would like. Diversification never works perfectly, but it remains one of the best tools we have to mitigate risk and volatility over time.
Q) If interest rates are going higher, should we sell out of bonds?
Markets are forward looking, and a good portion of the pain for bonds has been the result of the market anticipating where rates are headed according to the Fed. In other words, current bond prices already reflect expected rate increases.
The good news for bonds is that the short-term pain means they are much more attractive than just a few months ago. The rise in yields means greater interest income, which can increase overall return over time. Higher yields mean the long-term outlook for bonds has gotten better.
Q) How long will it take for the stock market to recover if we have a bear market?
Every situation is, of course, unique. The overall health of the economy has a big impact on recovery time.
Going back to 1957, 8 out of 15 bear markets were back to breakeven in less than a year. Since 1990, the S&P 500 has experienced seven drops greater than 19%, including a 34% decline in 2020. In five of these seven “bear markets,” the market recovered in six months or less. (The dot-com bubble and the Great Recession were the glaring exceptions.)
Even more recently, the market has experienced a negative 12-month total return 7 times since 2010. Each time the index bounced back with a gain of at least 15% over the next 12 months, with an average return of 27.6%. A rapid market recovery is by no means guaranteed, but it’s certainly not uncommon.
One of the benefits of a periodic portfolio rebalancing approach is that it requires buying stocks when they have fallen. It’s not comfortable and requires discipline, but it works out well over time when stocks do eventually recover.
Q) What happens if we experience a recession?
The stock market does a pretty good job of looking ahead, and typically moves before the economy (both up and down). Stocks have actually gained 3.6% on average during the past 13 recessions, and 5 of those 13 recessions saw double-digit gains.
Q) Is this the beginning of a global economic collapse and financial Armageddon?
We can’t rule it out.
However, exactly zero of all past bear markets or economic recessions have led to a complete global meltdown, so the odds seem favorable that we can skirt that outcome once again.
In turbulent times it can be awfully challenging to maintain a long-term perspective toward investing, yet that’s exactly what’s needed. Investment allocations were set with a long-term focus, knowing that difficult periods are always part of the process.
A quote from Michael Batnick (Ritholz Wealth Management LLC) sums it up quite well – “It’s easy to overweight comfort today at the expense of success tomorrow.” Some short-term pain is unavoidable, and we need to accept some level of discomfort in order to benefit from the long-term rewards of investment markets. Sticking with the process through thick and thin is what leads to the best results.
Let us know if your questions haven’t been answered – we’re here for you!