Asset Prices

Posted By Darren Winters on Mar 23, 2023

Asset Prices

Last year, 2022, was the worst year for asset prices across the spectrum, with 30 trillion dollars slashed off investment portfolios.

Paradoxically, so-called safe-haven assets such as treasuries performed the worst in history, which is the crux of the bank liquidity crisis and bank runs in 2023. 

Last year was the first time in decades that asset prices for stocks and bonds fell together due to the Fed raising rates at the fastest pace in 40 years. Moreover, 2022 was the first time in decades that stocks and bonds posted negative returns in decades. 

How frequently do asset prices for stocks and bonds post negative returns?

Over four decades, this has happened 2.4% of the time across any 12-month rolling period.

To see how various stock and bond asset allocations performed over history see Vanguard.

Based on data between 1926 and 2019, the table looks at the spectrum of market returns of different asset allocations:

Combination of assets, asset prices, and their returns 

So a portfolio containing 100% stocks returned 10.3% on average, the highest across all asset allocations. But the stocks-only portfolio came with wider return variance, with an annual low of -43% and a high of 54%.

A traditional 60/40 portfolio, which lost its appeal in recent years as low-interest rates have led to lower bond returns—saw an average historical return of 8.8%. It will be interesting to see with interest rates and bond yields rising whether this improves investor appetite for bonds.

A 100% bond portfolio averaged 5.3% in annual returns over the period.

So stocks, over the long term, have been the best asset class offering the highest average return.

When did asset prices of stocks and bonds break the trend and move down together?

Last year 2022, and 1969 stocks and bonds moved in tandem in a negative direction. In both periods, inflation was accelerating, and the Fed was hiking interest rates to cool inflation. In fact, historically, when inflation surges, stocks and bonds have often moved in similar directions.

Real interest rate volatility. Real interest negatively impacts stock and bond returns because higher interest rates potentially reduce the future cash flows of these investments.

Moreover, when the economic outlook is uncertain and interest rate volatility is high, investors become risk-averse and demand higher returns for taking on higher risks. So this can push down equity and bond prices.

Alternatively, when the economic outlook is positive, investors may be willing to take on more risk, which can also increase stock prices.

So asset prices across the asset spectrum are experiencing high volatility due to aggressive swings in central bank liquidity 

But if history is anything to go by, investors over the last century did well over a long-term horizon, despite fluctuation in central bank liquidity.

Submit a Comment

Your email address will not be published. Required fields are marked *

Subscribe to my Investment Newsletter and receive the FREE video:  3 OF DARREN’S BEST INVESTMENT STRATEGIES

You have Successfully Subscribed!

Pin It on Pinterest

Share This

Share This

Share this post with your friends!