A painful 2022 for global markets driven by high inflation, aggressive monetary tightening and geopolitical instability delivered many important lessons for investors. And, notably, 2022 brought home the message that conventional wisdom and common “rules of thumb” for investing should be viewed skeptically.
In a new global markets report – 5 Things We Learned About Investing in 2022 − Morningstar Indexes Strategist Dan Lefkovitz recaps 2022 for investors, urging them to expect the unexpected, prepare for the worst and accept how little certainty there is in investing:
- Diversification isn’t always a free lunch (and bonds aren’t always ballast). The Morningstar US Moderate Target Allocation Index, which represents the traditional mix of 60% stocks and 40% bonds, has declined 14.6% year-to-date as of December 16th, showing that bonds don’t always cushion falling equity markets. Global multi-asset indexes are also down in 2022. In yet another unexpected market development of 2022, the Morningstar Global Upstream Natural Resources Index rose 13.6% amid a resurgence in energy-related stocks.
Rising interest rates don’t have a predictable impact on stocks. Who would have guessed that dividend stocks would outperform in a rising rate environment, with the Morningstar Global Dividend Yield Focus Index up 5.2% in 2022 even as the broad equity market was down double digits? And, contrary to the popular narrative this year, growth stocks don’t always underperform as rates rise. True, the Morningstar Global Value Target Market Exposure Index has trounced the Morningstar Global Growth Target Market Exposure Index by nearly 20% in 2022, but growth has outperformed value in previous rising rate environments.
Sustainable investments aren’t immune to market cycles. After outperforming its parent index by 28% over the five years ended December 31, 2021, the Morningstar Global Sustainability Leaders Index declined 24.7% in 2022, hurt by its growth bias, too little energy and too much technology exposure. But a value or dividend-tilted approach to sustainable investing would have potentially been more successful in 2022.
Growth themes don’t always grow. The Morningstar Exponential Technologies Index rode the wave of growth in computing, healthcare innovation and robotics, rising 171% through the five years ending December 31, 2021. The Index has come back to earth in 2022, losing more than 25% year-to-date as overvaluation sank many thematic investments in 2022.
Private markets don’t always go up. The cohort of late-stage venture capital companies with $1 billion-plus valuations has lost some steam in 2022, with estimated valuations for the 1,244 companies in the Morningstar PitchBook Global Unicorn Index in negative territory for 2022 and the rate of unicorn creation slowing.
Dan Lefkovitz, Index Strategist, Morningstar
“Market behavior in 2022 demonstrated that much of the received wisdom in investing is flawed. The forces that move markets are varied, unpredictable and ever-changing. Relationships between asset classes are constantly in flux. Investors need to accept uncertainty and prepare for the unexpected.”
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