At this point in 2022, the current bear market dominates investing news. Prospects of continued inflation and rising interest rates leave investors scrambling to configure their portfolios in a way that lets them sleep at night.

The Bear Market

The first group of articles to be discussed cover the bear market and try to put today’s situation into some historical context. First up is this Statista article, which compares the length and depth of bear markets back to 1973, and includes how long each recovery took. It is based on the S&P 500, and so far this year (through June 13), it has declined by 22%. Note the brief but much steeper drop we experienced at the beginning of the pandemic!

Next up is an article from Slate. It too includes historical comparisons, but explains that higher inflation and interest rates lead many to less risky assets (Treasuries) with now higher yields, and away from stocks. The added components in this article are an explanation of where the terms “bull” and “bear” come from to describe the markets, and an attempt to depoliticize the reasons we are where we are.

A third article from A Wealth of Common Sense takes the historical comparisons one step further, and looks not just at stocks but at the 60-40 portfolio over the years. It looks at the worst single years, the worst five-year, and the worst ten-year returns. While this year so far looks to be one of the worst single year returns to a 60-40 portfolio, there were only four five-year returns in negative territory, and NO ten-year returns. In the short-term, dealing with the landscape we face is difficult, as bond-yields may in fact be rising, but that means bond prices are falling, and if you are already holding bonds, the drop in price is what you are seeing and feeling. Stock and bond prices may BOTH be falling as inflation continues.

Given the recent extended run of historically low yields, investors were staying away from bonds for a while. The Wall Street Journal (subscription may be required) suggests it is time to reconsider.

"It is time for investors who have shunned bonds for years to reassess their objections. Bonds offer no magic fix to the difficulties investors face with inflation, but they are finally competitive with stocks again as portfolio building blocks."

The data presented in this article demonstrate that bond yields of all categories of bonds are currently higher than dividend yields. Which bonds should you choose? The investor needs to determine where they are on the risk-reward spectrum when deciding which bonds to invest in, weighing the potential risk of recession and its impact on default the risk of lower-rated bonds.

IPOs 

Another casualty of the bear market has been IPOs. This makes perfect sense. IPOs are down 74% from the same period last year, and 300 companies are anxiously waiting for conditions to improve to proceed. (Barrons)

Tax Loss Harvesting

A bear market may bring with it some opportunities—specifically, for tax loss harvesting. This WSJ article (subscription may be required) does a great job of explaining how this can help individual investors with investments outside of their tax-advantaged retirement plans. If you decide to sell stocks or crypto and take a loss, the loss can be used to offset a current or future tax-year capital gain. It doesn’t have to be the same type of asset. A crypto loss can offset a stock gain, or a stock loss can offset a real estate gain. And if you have no capital gains, you may be able to use up to $3000 of a loss to offset ordinary income.

Active vs. Passive Investing 

We hear (and give) the same advice repeatedly: invest in stock market index funds. It always helps to make the point with convincing empirical evidence. Morningstar published the results of a really interesting study comparing returns to portfolios comprised of Vanguard’s active and passive funds since 1992. Vanguard’s active funds are very low cost and managed with a high degree of consistency over time, virtually eliminating what most knowledgeable investors' objections to about actively managed funds, so this study tries to get down to strictly performance. The author constructed four hypothetical portfolios (all Vanguard), each consisting of two funds, and studied the returns over the 30 years they have all been in existence. Three were comprised of two active funds, and one of index funds. Can you guess the outcome?

Other Asset Classes

The hot housing market looks like it is finally cooling off, but this downturn will not be anything like the 2007 meltdown from a credit perspective. (CNBC)

• Mortgage delinquencies are low
• There are far fewer ARMs
• The average mortgage holder has a credit score of 750, compared to 699 in the past.
• The pandemic-fueled run up in housing values has led to a much lower average debt-to-equity ratio for homeowners.
• However, high prices and high mortgage rates are negatively impacting many first-time and lower income homebuyers.

While cryptocurrency has its own PD and it’s own update (What’s New With Cryptocurrency 2022), it is hard to leave it totally off of an update on investing, especially when it is crashing harder than the stock market as I write. (AP)

• Bitcoin dropped close to 10% on Saturday alone, falling below $20,000.
• Bitcoin is 70% off its peak price last fall.
• Ethereum is following the same downward path.
• Cryptocurrency has dropped from a market value of $3 Trillion to under $1 Trillion.
• Calls for regulation are getting louder, and the crypto industry is stepping up its spending on lobbyists.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.