It may seem hard to believe, but as of the time of this writing we are over 254 days into this current bear market. The stock market (as measured by the S&P 500) peaked back on January 3, 2022. As of today, and including yesterday’s significant drop, the S&P 500 has lost around 17% and bonds have lost around 13% this year. While the current selloff is somewhat routine for stocks, as we tend to experience one or two of these downturns every five years, the selloff in bonds is exceedingly rare. Reuters recently claimed that this year’s bond market performance is the worst in the history of the bond market. However, with all of the bad news there are, as usual, reasons to be optimistic.
Knowing that we are 254 days into this bear market may make you wonder how long the average bear market for stocks lasts - the answer is 289 days. If the average were to hold that would mean the market would start moving in the right directly around mid-October. Averages are of course just that, averages. They are not predictors of the future but they do provide some context. While it doesn’t look like this bear market will be shorter than the average, it could certainly be longer. However, the one thing that I believe, and I feel that every long-term investor should also believe, is that this bear market will come to an end at some point - just as every bear market that has come before this one has done.
As for the bond market there are also reasons to be optimistic. As the Fidelity portfolio manager Jeff Moore put it - bonds are self-healing. Consider for a moment how a bond fund works. The typical bond fund owns hundreds if not thousands of individual bonds. As the current holdings in the fund mature the proceeds are used to buy new, higher yielding bonds to replace the old lower earning ones. The same goes for the interest payments made by all of the current bonds - they too are reinvested at higher yields. The result is that over time you end up with a portfolio of higher yielding, and thus more valuable bonds. Couple this with the fact that interest rates will eventually stabilize and that bonds are rarely down for multiple years and I believe there is ample reason to be optimistic about the bond market.
There are other positives helping to offset inflation. For example, U.S. Government I-Bonds are currently yielding 9.62%. Social Security was increased by 5.9% for 2022 and stands to increase even more for 2023 - which directly benefits both those currently retired and those of us not yet retired. Interest rates paid at many FDIC insured online banks are currently hovering just below 2%, compared to around .60% this time last year. Dividend yields on stocks have also increased significantly since last year.
This year’s markets have provided very few reasons to rejoice. It’s been a long and difficult year for the economy and for capital markets. However, times like these are as necessary to the healthy functioning of our financial system as the good years are. This time period should pass just like the other poor periods that came before. For now, our best defense just might be healthy doses of patience and optimism.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment, legal or tax advice. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. If you have any questions regarding this blog post, please contact us.