Stocks worldwide returned an average of –12.78% during the first four months of 2022, while bonds returned –8.47% on average.[1] Volatility has remained high in the early days of May.
Investors are challenged with how to respond—if at all—to both the simultaneous downdrafts in stocks and bonds and muted expectations for market performance. Beyond disappointing short-term returns and a spike in volatility, investors face multidecade highs in inflation across much of the globe, the prospect of the end of a long era of “easy-money” central bank policies, the war in Ukraine, and the effects of the COVID-19 pandemic, including economy-disrupting shutdowns in China. The Federal Reserve’s interest rate hike this week was a capstone to an already volatile period.
The litany of economic and market woes might tempt some investors to go all in on cash, but that would be almost ensuring a negative return when adjusted for inflation. As the charts below illustrate, the chances of a negative real return are much lower for stocks and bonds compared with cash, particularly as the holding period gets longer.