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EVERY MARKET DECLINE is different, but all of them can feel unnerving, even for the most steadfast of investors. Spooked by 2022’s financial market turmoil? There’s good news: Stock and bond values today look much more compelling than at the turn of the year.
Thanks to 2022’s 14% drop, the S&P 500 now trades below its five-year average price-to-earnings (P/E) ratio, based on expected profits. On top of that, corporate earnings rose impressively in this year’s first quarter. Stock-pickers might be enticed by inexpensive value companies, as well as by so-called GARP—or growth at a reasonable price—stocks.
What about P/E ratios in other market niches? No two ways about it, U.S. small- and mid-cap stock valuations are cheap. Venture overseas and you’ll also find attractively priced companies.
While the year-to-date S&P 500 decline is nothing to scoff at, a 14% drop is pretty typical for market pullbacks in each year since 1980, according to Ryan Detrick at LPL Research. Detrick’s analysis also highlights that midterm election years tend to be particularly volatile for stocks. In such years, the S&P 500 usually doesn’t bottom until well into the third quarter—but returns from there are often stellar.
Still, logging onto your brokerage account this past weekend was no fun, and that goes for both stock and bond investors. The U.S. aggregate bond market is down more than 11% from its August 2020 peak. That 21-month drawdown is the sharpest since 1980. Couple a rough bond market with significant stock losses, and the Vanguard Balanced Index Fund (symbol: VBIAX), down 12.2% in 2022, has never had a worse start to a year.
Retirees might be particularly nervous since they probably haven’t endured such negative returns from both stocks and bonds. The good news: Bond yields now look decent. I urge readers with significant bond exposure not to bail out. The yield on the broad U.S. bond market is up to 3.35%. That’s higher than the expected 10-year inflation rate. At 4.19%, high-quality corporate bonds are near their highest yield in a decade.
In early 2021, euphoria was rampant. Today, bullish sentiment is near record lows. But that’s another reason to be optimistic. Historically, when others are fearful, that’s often been the time to get a little greedy.
In times like these, diversification shines. Physical real estate is mostly doing well, and the business environment is generally good, even if retirement investments have taken a dive.
I-Bonds provide some nice inflation protection, but the limit in purchases is $10K per person.
I was anticipating seeing some additional comments from those with traditional pension plans, like Richard, about the impact inflation on the loss of purchasing power. I have seen some governmental plans with some annual increases but for those with a fixed annual pension as their primary source of retirement income their financial future seems bleak. It seems Mike is in the Warren Buffet camp on when to invest, a good place to be in my opinion. Any thoughts for those persons?
My pension has not increased since it started in 2010 and never will, so yes there is a growing impact.
To make matters worse my employer dropped retiree Medicare supplemental health insurance and replaced it with a annual HRA contribution. That’s ok for now – unless a retiree is taking an expensive medication.
However, the HRA increases by a fixed 1.5% a year whereas we had been told the percentage company contribution at retirement toward coverage would never change. The result is every year a greater percentage of higher premiums fall on the retiree.
I’m okay for now, but only because I retired with a sufficient cushion of income over expenses.
A corporate bond rate of 4.19% looks great, until one considers inflation. Losing a few percentage points of one’s purchasing power each year is a tough spot, especially for newish retirees who planned to live off retirement dollars accumulated over the past forty years.
Even a couple years of down markets with high inflation could discredit the idea that ordinary people can save enough during their working years in retirement vehicles to adequately supplement social security.
The market is pricing in 10yr inflation at 2.81%.
https://fred.stlouisfed.org/series/T10YIE
There’s nothing we can really do about the inflation rate. It’s all about choosing the right investments based on your risk and return objectives. Taking excess risk just because of inflation is not a wise move.
Thanks for your insight. I know I feel quite shaken when I look at my accounts even though I am not living off our investments.
I can only imagine how some retirees with a nest egg sufficient to just cover expenses must feel. On the other hand it appears having cash reserves was always good advice.
Thanks. As for bond losses, Josh Brown put it bluntly this morning: “Seriously, stop … crying about bond yields. This is HELPING you.”
Tough words but true for retirees right now.
And to think, the Fed has only raised rates 1/4 point so far–they’re barely getting started, and already bonds have gotten slaughtered. However, from what I’ve seen, it looks like the bond markets have “priced in” rate increases that would total about 2.5% or so on the shorter- to mid- end for this year. If rates don’t go higher than that, prices shouldn’t fall much farther. However, if they need to go higher, in order to quell inflation for example, the slaughter is only beginning. Having a large position in bonds right now would definitely be a tough spot to be in. This is one of the few times over my investing career I actually feel safer with a large position in stocks (index funds, of course), vs a large position in bonds.
The market already expects the Fed to raise its short-term target policy rate to above 3% by mid/end next year.