Six Good Things to Tell Clients About This Horrible Market

This has been a very painful year in investing. Not only are stocks in a bear market but, instead of acting as a shock absorber, bonds are having their worst year ever. For bonds, this is the equivalent of the 88% stock plunge during the Great Depression.

Below is a summary of bond performance from Edward F. McQuarrie, Professor Emeritus in the Leavey School of Business at Santa Clara University who has long researched the history of bonds.

*Values are for the first nine months. Trailing 12-month returns also exceeded the historical worst; in fact, for the two intermediate types (VGIT and BND) returns since 9/30/2021 were slightly worse than those shown.

But there are nuggets of good news:

1. Bonds are finally giving a real yield. Going into 2022, yields were dismal. You could earn 1.26% on a five-year Treasury bill. If you wanted some inflation protection, a five-year Treasury Inflation Protected Security (TIPS) yielded a negative 1.61% annually. Investors were guaranteed to lose spending power.

Perhaps the only silver lining in the bond market plunge is that rates are getting better. While nominal yields have surged, real yields on TIPS have gone from negative to positive. That five-year TIPS is now yielding a positive 1.56%. One can finally be assured of earning more than the CPI-U. That’s a good thing. TIPS are more attractive today than they have been in years.