What does the breadth of last year’s decline suggest for the coming years?

Last year was a challenging one for investors, with both stocks and bonds posting negative returns. In fact, last year’s market decline was among the broadest based in recent decades, with nearly all asset classes posting negative returns to varying degrees, leaving very few places for investors to proverbially hide.

As shown in the chart above, 94% of Morningstar’s U.S. mutual fund categories recorded negative average returns for the 2022 calendar year — a nearly universal negative year rivaled only by the global financial crisis in 2008. Out of the 112 distinct Morningstar mutual fund categories with performance data for 2022, only seven posted positive average returns over the calendar year period. What were these categories that managed to do so? Most were focused on commodities or natural resources that were lifted by the surge in energy prices last year; others directly or indirectly benefited from that same trend. That was a meaningful change for commodities, which had been among the worst-performing asset classes of the past decade.

Is there a silver lining? As illustrated in the chart, such extreme periods in which virtually all asset classes are negative have typically been followed by periods in which the overwhelming majority of categories provide positive returns. From 1990 – 2021, there were three other calendar years in which more than 70% of Morningstar categories experienced negative returns. In each case, positive returns followed for most asset classes, typically for multiple years.

Whether something similar plays out in 2023 and beyond remains to be seen. Still, if history is any guide, last year’s widespread negative returns across most asset classes are unlikely to be repeated over the next few years.