Historic Correlation Breakdown
2022 will be remembered as one of the worst years for balanced portfolios in modern history. For the first time since the 1970s, stocks and bonds declined simultaneously and significantly, with the traditional 60/40 portfolio suffering its worst annual return (-17.8%) since 2008.
The Inflation Shock
- Peak CPI: U.S. Consumer Price Index hit 9.1% in June, highest since 1981
- Broad-Based: Inflation spread across food, energy, housing, and services
- Global Phenomenon: Europe faced 10.6% inflation driven by energy crisis
- Wage-Price Spiral Fears: Wage growth accelerating to 5.5% raised entrenched inflation concerns
Aggressive Fed Tightening
- March 2022: First 25bp hike, ending zero-rate policy
- May-November: Four consecutive 75bp hikes, fastest pace since 1994
- Year-End: Fed funds rate reached 4.25-4.50%, up from near-zero
Asset Class Performance
Equity Markets:
- S&P 500: -18.1% (worst since 2008)
- Nasdaq Composite: -33.1%
- Russell 2000: -20.4%
- Technology stocks particularly hit: Meta, Amazon, Netflix all fell 50%+
Fixed Income Devastation:
- Bloomberg US Aggregate Bond Index: -13.0% (worst year on record)
- US 10-Year Treasury: -17.8%
- US 20+ Year Treasury: -31.0%
- 10-year yield surged from 1.51% to 3.88%
Cryptocurrency Implosion:
- Bitcoin fell from $47,000 to $16,500 (-65%)
- Ethereum dropped from $3,700 to $1,200 (-68%)
- TerraUSD stablecoin collapsed, wiping out $40B
- Three Arrows Capital, Celsius, Voyager, and FTX all filed bankruptcy
What Worked
- Energy Stocks: S&P 500 Energy sector gained +59%
- Cash: Money market funds yielding 4%+ attracted $300B in inflows
- Dollar: US Dollar Index surged 8% to 20-year highs
- Commodities: Oil +7%, natural gas +20%, gold flat
Geopolitical Shocks
- Ukraine Invasion: Russia's February 24 invasion disrupted energy and food markets
- Energy Crisis: European gas prices surged 10x at peak
- Food Security: Ukraine/Russia export 30% of global wheat
- Sanctions Impact: Swift financial restrictions reshaped trade flows
Portfolio Lessons
- Correlation Breakdown: Stocks and bonds fell together when inflation drove both
- Duration Risk: Long-duration bonds behaved like long-duration stocks
- Alternative Assets Valuable: Private credit with floating rates performed well
- Cash Role: Cash became viable asset class again at 4-5% yields
Sources: Bloomberg indexes, Federal Reserve data, Bureau of Labor Statistics