During the second quarter of 2022, the best performing asset classes were bonds and emerging markets stocks. The following chart shows the 3-month, year-to-date (YTD), and 20-year performance of many DFA funds (representing different asset classes) compared to the S&P 500 Index:
Market Returns for the period ending June 30, 2022
| DFA Fund / Index | 3 Month Return | Year to Date Return | 20 Year Return* |
| S&P 500 Index | -16.10 | -19.96 | 9.08 |
| DFA World Core Equity | -14.28 | -18.11 | N/A |
| DFA U.S. Large Value | -12.13 | -12.44 | 8.36 |
| DFA U.S. Small | -13.71 | -18.85 | 9.23 |
| DFA U.S. Small Value | -12.63 | -12.70 | 8.98 |
| DFA Real Estate (REITs) | -14.75 | -19.19 | 9.17 |
| DFA Int’l Large | -13.22 | -17.50 | 5.51 |
| DFA Int’l Large Value | -11.59 | -9.79 | 6.07 |
| DFA International Small | -15.01 | -21.30 | 8.45 |
| DFA Int’l Small Value | -13.65 | -15.88 | 8.68 |
| DFA Emerging Markets Core | -11.26 | -14.62 | 8.98 |
| DFA 5-Year Global Bonds | -1.47 | -5.98 | 2.67 |
| DFA Inflation Protected Bonds | -6.52 | -9.37 | N/A |
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
As reflected in the chart above, the stock and bond markets continued to fall in the second quarter as the Federal Reserve grew even more aggressive in their effort to fight inflation. The committee raised interest rates .50% in May and another .75% in June. They also indicated that they expect to raise rates another 1.75% over the remainder of 2022. All of this has caused the stock market to behave as if there will be a potential slowdown in the economy, which could lead to lower corporate profits.
The result from these aggressive maneuvers is the overall bond market* has declined approximately 11% and the global stock market** has declined approximately 20% for 2022. This is the worst start to a year for the stock market in 52 years. Despite this fact, there is a very strong case for being optimistic about the future.
According to Dow Jones Market Data, “when the S&P 500 has fallen at least 15% the first six months of the year, as it did in 1932, 1939, 1940, 1962 and 1970, it has risen an average of 24% in the second half.” On top of that, our friends at DFA researched the average cumulative return following a 20% stock market decline going back to 1926:
1-Year Average Cumulative Return = 22.2%
3-Year Average Cumulative Return = 41.1%
5 Year Average Cumulative Return = 71.8%
Obviously, past performance does not guarantee future returns, but we remain extremely confident that the investment markets will eventually rebound, even if the economy enters a recession. We will remain disciplined while we wait for markets to recover. For our retired clients who are making annual distributions, we have designed your portfolios to have enough short-term bonds to cover your distributions for 5-10 years, if needed. In addition to harvesting losses in taxable accounts, we will continue to rebalance client portfolios to take advantage of the downturn, which history has shown will speed up your recovery once the markets turn around.
We understand the stress and worry that large market declines can induce, but that is why it’s so important to have an investment plan before this happens. Planning for the occasional downturn and knowing what to do when the stock market declines makes it much easier to deal with. A smart investment strategy, combined with a detailed financial plan, help us put into context how lower stock prices impact your goals and what actions should be taken during these stressful moments, if any.
Thank you for your continued trust and confidence. As always, please don’t hesitate to call if you need to discuss something—that’s what we are here for.
Enjoy your summer!
*As measured by Vanguard Total Bond Market (VBTLX)
**As measured by Vanguard Total Stock Market (VTWIX)
About Christopher Jones
Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.
