Jan 24, 2023

2022: Year in Review
When is a “Bear Market” not a Bear Market?

Jan 24, 2023
Mark R. Gordon — JD, MPP, CFP®, CFA
Chief Investment Officer
Fourth quarter 2022 provided a bit of comfort in an otherwise very difficult year for investors. Over the last three months of the year, global stocks returned almost 10%.¹  US stocks rose about 7.5%, emerging-markets stocks went up nearly 10%, and developed-foreign stocks soared more than 17% as inflation fears died down.²

Despite the strong finish, stocks still had their worst year since the financial crisis of 2008. Both the global and US stock markets ended the year down more than 18%. Moreover, the financial media spent most of last year breathlessly covering the “Bear Market”: are we going to have a Bear Market? How long will the Bear Market last? How can we “Bear-Market Proof” our investments? Yet they glossed over one very important point: a Bear Market for whom?

Technically, a bear market occurs when stocks lose 20% or more of their value from top to bottom.³ But not all stocks go down in a bear market. Thus, when pundits refer to a “Bear Market,” they refer to a drop in the value of one or more major stock indices. For US stocks, that index is typically the S&P 500: basically the 500 largest stocks in the United States. Although those stocks together comprise roughly 80% of the US market capitalization, they represent a small minority – less than 10% – of publicly traded US companies.⁴ Today we’ll examine the returns from other areas of the US market and explain why, despite the headlines, not all investors faced a bear market in 2022.

This chart shows the investment returns for the S&P 500 during 2022.

We can see the index experienced a bear market, declining as much as 24% before recovering somewhat to an 18% loss for the year.

The S&P 500, however, does not include the returns of many small and value stocks. Value stocks represent companies that tend to be low priced and/or distressed. The chart below compares the S&P 500 with the Russell 1000 Value Index, a common benchmark for value stocks:

Last year, value stocks held their value relatively well. They went down nearly 18% at one point but recovered to a yearly loss of less than 8%. Not only did value companies not reach the technical definition of a bear market, they wound up with a single-digit loss for the year.

The chart below compares the S&P 500 with the S&P 600, an index of small US companies that we typically use in our client portfolios.⁵ We can see that small companies also went through a bear market but recovered enough to outpace the S&P 500 by nearly 2%.

Next, the chart below shows the S&P 500 compared to an index of foreign-value companies:

Please note this does involve some cherry-picking: foreign-value companies were one of the top-performing asset classes last year, coming in at a loss of just over 5%. But we include it here to underscore our point that a Bear Market is highly dependent on the market or index we choose. Unfortunately, we found that subtlety lacking in the media coverage.

So, when is a Bear Market not a bear market? Last year, the likely answer was: For those with globally diversified portfolios that include small and value stocks. Sometimes, like during the 2020 COVID market drop, diversification feels like it works against us. At that time the S&P 500 held up better than most everything else. But over the long term, in our opinion, diversification works in our favor by investing in many areas of the capital markets so that our portfolios aren’t tied to one (relatively) narrow index.

Because each of our client portfolios is unique, we can’t make broad statements about investment returns. But we do recommend global portfolios tilted toward small and value companies; academic research shows they have higher expected returns over long periods of time. We suspect that, when clients review their year-end statements, they may be pleasantly surprised that the Bear Market of 2022 was not a bear market for them.

¹ Global stocks represented by the MSCI ACWI Index (Net). Past performance is no guarantee of future success. All invest returns are from Morningstar unless otherwise noted.

² US stocks represented by the S&P 500, developed-foreign stocks by the MSCI EAFE Index (Net) and emerging-markets stocks by the MSCI EM Index (net).

³ “What is a Bear Market,” Tretina & Curry, Forbes Advisor, 10/20/2022.

See, e.g., “S&P 500 or total stock market index for US exposure?”, Morningstar.com, 12/2/2013; “The Number of Companies Publicly Traded in the US is Shrinking – Or is it?”, benzinga.com, 10/30/2020

The Russell 2000 Index, a common small-cap index, had lower returns than the S&P 500 last year.

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