Global investment markets were lower in the 2nd quarter of 2022, as both stocks and bonds performed poorly in the first half of 2022. This was the worst six month start to the year for the S&P 500 in 52 years dating back to 1970, with the S&P 500 down 20.6%. While many commodities were down for the 2nd quarter it has still been a strong first half of the year overall for the asset class. This is highlighted through the NERT model allocations holding PIMCO Commodity Real Return Fund, which while down in the 2nd quarter is still up 15% for the year.
We have experienced multiple stock market corrections (20% or greater) over the years. So why does this time feel different in 2022? In our view it feels different not because of the movement in stock prices but because of the movement in bond prices over the same period. With inflation running high, the Federal Reserve has begun a tightening process by raising the federal funds rate. So far in 2022, the Federal Reserve has raised the federal funds rate in each of its last three meetings, (March 0.25%, May 0.50% and June 0.75%) for a total of 1.50% and expectations are for more raises later this year. The increases in interest rates have caused bond prices to drop, particularly intermediate and long-term bonds with longer duration. These losses were amplified because the yields going into 2022 were low, so the interest coming from the bonds could only offset a small amount of the capital loss. This has created the toughest year on record for US bonds going back over 40 years. As of the end of the 2nd quarter the year-to-date return for the Bloomberg Barclays U.S. Aggregate Bond Index shows. In 2022, the index is down 10.4%. To put this in perspective, since the index has been tracked dating back to 1976 (46 years ago) it has only had four calendar years in which the return was negative. The largest calendar loss being 2.9%. What this means is in past cycles when the correction in equity markets hurt investors, their portfolios had greater protection from drawdowns from their bond investments, but in this cycle, bonds are down heavily as well. This is in our view why in 2022 it has felt different. On a positive moving forward bond yields are higher and stock valuations are now back to their longer-term averages.
. 1st QTR 1 YR 3YRS 5YRS
Stable Income -6.15% 7.36% 1.80% 2.65%
Conservative Income -8.12% 8.84% 2.79% 3.78%
Traditional Pension -12.11% -12.90% 4.51% 5.80%
Equity Oriented -14.49% -12.90% 6.84% 7.80%
NERT Model Allocation – Choices for every investor
The NERT model allocations are designed to help participants build diversified allocations to capture the major market sectors and a variety of management styles. They are offered to aid typical participant needs for diversified, risk-adjusted allocations. NERT rebalances allocations on a regular basis attempting to keep a consistent risk and asset posture. The allocations will maintain some exposure even in underperforming classes. Diversification, by definition, means not all assets can have positive performance every period. The NERT model allocations are designed to allow any investor to participate in proven ways to reduce risk and improve returns over longer periods.
Given the current limitations on withdrawals from the Principal U.S. Property Fund, we created model allocations that removed the Principal U.S. Property Fund.
Andrew Casteel, CIO, CFP
Acorn Financial Advisory Services, Inc.