It doesn’t get much WORSE than this: Nothing was spared during this downturn. This was the 7th worst year for US Markets (as measured by the S&P 500) since the 1920s and the worst year for bonds (as measured by the Bloomberg Aggregate Bond Market Index) going back to the 1970s.
The chart below from the Financial Times summarizes just how rare, and extreme, the losses were in 2022 for stocks and bonds.
A silver lining in bond yields: When bond prices drop, yields increase. As the following chart illustrates, rates went from nothing to something in 2022, an extraordinary shift in the overall yield curve, at all maturities, as The Fed looked to tame inflation and investors demanded more yield for their savings.
In blue is the current yield curve, while grey is the yield curve from just 12 months ago. It is absolutely incredible to see the shortest-term deposits go from earning 0.01% to 4%+ in less than twelve months.
Do prices matter again? After watching growth stocks outperform value stocks for a number of years, 2022 saw a reversal of fortunes, with value stocks outperforming growth stocks in large, medium, and small-cap categories. With that said, performance was still negative, so any celebrations should be muted.
An exceptional year leads to… an average market: Following the stock market downturn in 2022, the US market is back to average.
How close to average? The 25-year average forward P/E is 16.82x. The current forward P/E? 16.65x.
International stocks are still historically cheap: Before absorbing the following chart, it is important to note that international stocks have traded at a lower valuation than US stocks on average for the past 20 years. What is extraordinary is just how much cheaper international stocks are (and have been for the past year) vs. US stocks.
As the chart below illustrates, we are still close to a two standard-deviation gap between US and International stock valuations vs. the 20-year average, even after international stocks outperformed US stocks in 2022 (-18.1% for the S&P 500 and -15.6% for MSCI All Country World Index ex. US).
Undoubtedly, there is a lot of concern and trepidation when it comes to geopolitics and economic growth overseas, but markets are already assuming that THIS is the worst environment for international investors in 20 years. Only time will tell if things can really get much worse from here, but statistics tell us that is very unlikely.