October 7, 2022

After a sharp rebound through the late summer months, stocks swiftly retreated in September after the Federal Reserve echoed their hawkish stance with a third consecutive triple rate hike of .75%.

Markets continued to tumble lower throughout September over fears that inflation is becoming broader based in the US economy. The August Consumer Price Index (CPI) print remained at elevated levels, falling weekly jobless claims confirmed a tremendously tight labor market, and a laser focused Fed to quell inflation were all contributors to the market's violent move lower. Despite some leading economic indicators weakening, investors have abandoned expectation in the short term for a Fed pivot to more moderate policies and this reversal-of-sentiment has placed downward pressure on risk assets.

In September, The S&P 500 Total Return Index sank 9.21% contributing to its year-to-date slide of 23.87%. Bonds also fell during the month as yields rose. The Bloomberg US Aggregate Total Return Bond Index dropped 4.32% for the month also extending the Index losses of 14.61% for the year.

2022 continues to be a historical year, not only in terms of Fed policy, interest rate moves, and geopolitical tensions, but also in terms of market volatility and price action. In our June update we noted one the worst starts to the 60/40 Stock and bond portfolio on record. And now that we have put another quarter in the rearview, we thought it might be helpful to illustrate a few charts to put these volatile times in perspective.

A combination of stocks and bonds in a portfolio continue to dominate traditional wealth management and retirement accounts. And for great reasons: both asset classes historically provide positive net returns over longer time periods and provide the benefit of diversification to the portfolio, by way of low correlations.  As you can see from the graph below in only two of the past twenty years have stocks and bonds finished with positive correlations, 2005 and 2006. And for the first time since 2006, the 2022 calendar year correlations between the S&P 500 Index and Bloomberg US Aggregate Bond Index have crossed positive territory. However, a key difference from 2006 is that both stock and bonds posted positive returns in that year, so the diminished diversification wasn’t nearly as painful as todays return outlook.

 

2022*is using calendar year data from January 1st through September30th.
(Data Source: Bloomberg Terminal, S&P 500 Index, Bloomberg US Aggregate Bond Index; Chart Source: Stadion)

 

Another interesting theme is the fact that 2022 has revolved around realized volatility. Although the markets are typically measured by the CBOE Volatility Index (VIX) level as a proxy for volatility, the VIX measure is an indicator of expected volatility not necessarily realized volatility. To better illustrate realized volatility we compiled the previous 20 years of daily returns and looked at their percentage of 1-day returns which closed by more than 1%, up or down. As you can see from these results, in an average year, the S&P 500 Index rises or drops by 1% or more in 29% of days as denoted by the orange line.  However, so far in 2022, the number of days closing higher or lower than 1% is right around the 50% mark, a feat that has not been reached since the Global Financial Crisis of 2008.

 

2022*is using calendar year data from January 1st through September 30th
(Data Source: Bloomberg Terminal, S&P 500 Index; Chart Source: Stadion)

 

In closing, although market volatility can be unsettling, it is not historically unusual.  And such conditions call for discipline in the face of complex and unstable markets. Fortunately, if you continue to maintain an investment outlook that matches your time horizon, risk tolerance, and other important considerations, then the market volatility of 2022 will likely be a small bump in the road on your longer-term investment journey.

Thank you for your trust in Stadion.

Brian Rosso, CFA
Portfolio Management Analyst