The Takeaway
Asset-class diversification has not paid off in 2022, as the Morningstar US Moderate Target Allocation Index (60% stocks/40% bonds) lost 20% over the first three quarters. But energy-focused investments have soared, led by the Morningstar MLP Composite Index. Within fixed income, the Morningstar LSTA US Leveraged Loan Index, representing an asset class that has historically performed well in rising-rate environments, is down just 3.2%.
The Morningstar US Core Bond Index's yield rose over the first three quarters of 2022 from 1.7% to 4.7%, a level not seen since 2008. Morningstar's leveraged loan index yields 8.5%. Income investors can be pleased.
The Morningstar US Market and Morningstar Global ex-US indexes now look more attractive on the basis of price/earnings, dividend yield, and Morningstar equity research-assigned valuation.
What a difference a year makes. At this time in 2021, financial markets were in an ebullient state. The Morningstar US Market Index, a broad gauge of equities, was on its way to a 25% calendar-year gain. "Meme stocks," special-purpose acquisition companies, and digital assets dominated the investment conversation.
Greed has turned to fear. In 2022, stubbornly high inflation, a string of steep interest-rate hikes, recessionary worries, conflict in Europe, and a soaring US dollar have triggered serious asset-price volatility. Global equities closed September in bear-market territory. The Morningstar US Market Index declined nearly 25% over three quarters, and the Morningstar Global ex-US Index was down more than 27% in U.S. dollar terms. The fourth quarter began with a powerful stock market rebound. But only time will tell if it's as ephemeral as the rally that lasted from mid-June to mid-August.
Rather than diversifying stock losses as they did in 2020, 2008, and 2000-02, bonds have plunged, too. Rising rates have sent yields soaring and prices into free-fall. The Morningstar US Core Bond Index, which measures the broad investment-grade-debt market, fell 14% in three quarters—a shocking loss for fixed-income investors. As central banks globally fight the inflation scourge, rate-sensitive government bonds have tanked. The Morningstar Global Treasury Bond Index was down 23%.
"Be greedy when others are fearful." "Buy when there's blood in the streets." These famous quotes make contrarian investing sound simple, but it is difficult to execute. Markets could easily fall further; inflation could persist; recession could rage; or the war in Ukraine could worsen. Yet down markets often present opportunities for patient investors, and markets offer far better value than at the start of the year.
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