How Should You Have Invested In 2022?

2022 is drawing to a close, and it’s been a tough for investors. Most asset classes, sectors and countries have seen negative returns for the year so far. That’s against the backdrop of U.S. inflation running at almost 8%. This means that returns in inflation adjusted-terms are notably worse. Nonetheless, there have been some pockets of positive returns. Which assets and strategies have offered the best returns for the year so far?

Short-Term Fixed Income

The fact that short-term government fixed income is among the better performing assets tells you how bad 2022 has been. This can happen in very weak years for markets, with the most recent example being 2018, another weak year.

Longer-term fixed income investments have generally lost money with the sharp rise in interest rates during 2022. However, 12 month government bills now offer a yield of just under 5%, that’s still below the rate of inflation, but this single-digit yield has delivered a better return than most other assets in 2022 so far. Even if yields were practically zero as we entered 2022.

Commodities See Another Strong Year

At the sector level, commodities have once again been a star performer similar to 2021. Energy and mining have been among the best performing sectors of the market delivering strongly positive returns for the year. Still energy and basic materials make up under 10% of the S&P 500. This helps explain why strong returns here have not been sufficient to turn U.S. indices positive.

Oilfield services have also benefited as higher oil prices start to lead to increasing investment in production. Separately, companies in the defense sector have benefited as the Ukraine war boosts spending on military equipment.

Stronger Country Performance From Latin America

At the country level, Latin America has seen some of the better country-level investment performance in 2022. Often these countries have benefited from higher weightings to energy and mining in their stock indices. Brazil, Mexico and Chile have all posted strong performance for 2022 so far.

Turkey has also had a great year, rebounding from a weak 2021. The performance of these countries has been more impressive in the context of a stronger dollar in 2022, which has generally been a drag on returns for foreign markets for U.S. investors.

Looking Forward To 2023

It’s less likely that 2023 will be as bad for investors as 2022. For example after 2018, where returns were generally negative, returns in 2019 were a lot more positive. Still a bad 2023 is not impossible, there have been examples of consecutive negative return years for U.S. markets in the 1930s, 1980s and the 2000s and the S&P 500 still trades at a rather lofty 20x multiple of earnings, which is historically high. Most of the world continues to face risks from inflation, rising interest rates and recessionary fears.

After what will likely be a year of weak returns such as 2022, it’s also important to remember that though diversified portfolios can lose money over the short-term, just as 2022 has shown, over a period of multiple years, returns have historically been more robust. 2022 has been a challenging year for most assets and isn’t necessarily a reason to abandon a well-grounded investment approach.