The 2022 bear market: inflation, Fed hikes and falling bonds

The 2022 bear market was unusual for one reason above all: stocks and high-quality bonds fell together. The S&P 500 dropped 25.4% from its record close on January 3, 2022 to its low on October 12, 2022, and the technology-heavy Nasdaq lost more than a third. Long-term US Treasury bonds, normally the cushion in a stock selloff, lost even more than the S&P 500 on a price basis. For investors holding a classic mix of stocks and bonds, there was nowhere to hide.

The cause was not a financial collapse or a pandemic shock but inflation, which reached its highest rate in four decades, and the Federal Reserve's response, the fastest series of interest-rate increases since the early 1980s. This article explains how rising rates hit both asset classes, follows the year on SPY, QQQ and TLT data, and shows how long the recovery took.

Why 2022 was different

In most bear markets of the past 25 years, US Treasury bonds rose while stocks fell. In 2008 and 2020, investors fled to government bonds, and interest rates were cut. A portfolio of stocks and bonds lost less than stocks alone, which is the main argument for Asset allocation: how stock, bond and cash mixes have behaved.

In 2022 the shock itself was rising interest rates, so both sides of the portfolio took it at once. The S&P 500 fell about 19% in calendar 2022 on a price basis. The broad US investment-grade bond market lost about 13%, its worst year in the history of the standard index. The two assets moved together, the opposite of what many investors had come to expect.

Inflation and the Fed

Inflation began rising in 2021 as the economy reopened. Demand, fed by pandemic savings and government support, ran into supply chains that could not keep up. For much of 2021 the Fed described the rise as likely to be transitory and kept its policy rate near zero while still buying bonds.

By early 2022 that view had changed. Russia's invasion of Ukraine on February 24, 2022 sent energy and food prices higher still. The consumer price index rose 9.1% in the 12 months to June 2022. The Fed then moved fast:

At the same time, from June 2022 the Fed began letting the bonds it held mature without replacing them, known as quantitative tightening. The 10-year Treasury yield, about 1.5% at the end of 2021, was above 4% by October 2022.

How rising rates hit stocks and bonds

Bonds

A bond pays fixed interest. When new bonds pay more, existing bonds with lower coupons are worth less, and the longer the bond, the bigger the price drop for each point of rate increase. That sensitivity is called duration. Long-term Treasuries, with durations near 17 years for a fund like TLT, fell hardest. They carry almost no default risk, but they carry a great deal of interest-rate risk.

Stocks

A stock's value is, in theory, the present value of its future profits. When interest rates rise, the discount rate applied to those profits rises, and profits far in the future lose the most value. That is why the companies priced on rapid growth years ahead, unprofitable technology firms and other high-P/E growth stocks, fell hardest. Energy stocks, helped by high oil and gas prices, rose sharply in 2022, and value stocks as a group held up much better than growth (see Growth vs value investing: styles, P/E and the long record).

The year on real data

The chart rebases three ETFs to 100 at the end of 2021 so their paths can be compared directly.

Three things stand out:

1. The decline was a grind, not a crash. There was no single day like 1987 or March 2020. The S&P 500 fell in waves through the first half, rallied strongly in July and August, then made its low in October. The VIX stayed elevated but never approached its 2008 or 2020 peaks (see Volatility and the VIX: historical vs implied volatility explained).
2. Growth fell most. QQQ's drop of a third was far larger than SPY's quarter, and its low came later, in December.
3. Bonds did not recover with stocks. As the Fed kept raising rates into 2023, long-term yields climbed further, near 5% in October 2023, and TLT made a new low that month, about 44% below its December 2021 level on price. Stocks were already rising by then.

The recovery

Stocks recovered faster than many expected. Inflation began to ease from its mid-2022 peak, corporate profits held up, and enthusiasm over artificial intelligence lifted the largest technology companies from early 2023. The S&P 500 set a new closing record on January 19, 2024, about two years after the January 2022 peak. On Finabase's monthly data, SPY's and QQQ's December 2023 closes were back above their December 2021 levels. The Nasdaq Composite needed until February 29, 2024 to close above its November 2021 record.

Long-term bonds are a different story. At the end of September 2026, TLT's price was still about 48% below its December 2021 close on our monthly data. Interest payments, which the price chart excludes, offset part of that, but holders of long bonds bought in 2021 have had the slowest recovery of any group covered here. Their loss came from buying fixed payments when yields were near historic lows.

No recession was declared for 2022. Unemployment stayed at or below 4% through the year, which is part of why profits, and eventually stock prices, held up.

Lessons for investors

• Bonds diversify stocks only against some shocks. Treasuries protected portfolios in 2008 and 2020, when the shock was falling growth. Against an inflation shock, both can fall. Shorter-term bonds and cash fared much better than long bonds in 2022.
• Starting yields matter. Bonds bought at 1.5% had little income to cushion a price fall. When yields are higher, the same rise in rates does less damage.
• Valuation and rates are linked. The stocks that had gained most from near-zero rates had the most to lose when rates rose.
• Rebalancing works in grinding declines. Investors who rebalanced back to their target mix in 2022 bought stocks at lower prices; see Rebalancing a portfolio: calendar vs threshold, drift and taxes.

How Finabase helps

The comparison view plots SPY, QQQ and TLT on one chart, the same three funds as the figure above, and you can set the range to look at 2022 directly. The 10-year Treasury yield page shows today's yield, which drives the bond math described here; our stored index history begins in November 2021, so it covers the whole 2022 rate shock. The indices page tracks the major stock benchmarks, and the sector page shows how energy, technology and other sectors are doing, the split that defined 2022.

Frequently asked questions

Why did stocks and bonds both fall in 2022?

Because the shock was rising inflation and interest rates. Higher rates lower the price of existing bonds and raise the discount rate applied to company profits, so both fell. In most earlier bear markets, falling growth led to lower rates, which helped bonds.

How much did the S&P 500 fall in 2022?

From its January 3, 2022 record to its October 12, 2022 low, the S&P 500 fell 25.4%. For the calendar year it lost about 19% on a price basis.

How many times did the Fed raise rates in 2022?

Seven times, from a 0–0.25% target range to 4.25–4.50%, including four consecutive 0.75-point increases from June to November. Four more increases in 2023 took the range to 5.25–5.50%.

When did the stock market recover from the 2022 bear market?

The S&P 500 set a new closing record on January 19, 2024. The Nasdaq Composite regained its November 2021 record on February 29, 2024.

Is the 60/40 portfolio dead after 2022?

One bad year does not settle it. 2022 showed that a stock-bond mix can fall sharply when inflation drives both lower. Higher starting yields since then give bonds more income to offset future price falls, but no mix protects against every kind of shock.

Summary

The 2022 bear market was driven by the highest inflation in four decades and the Federal Reserve's fastest rate increases since the early 1980s. Higher rates pushed down both bond prices and the value of growth stocks, so the S&P 500 fell 25.4%, the Nasdaq more than a third, and long-term Treasuries even further on price. Stocks regained their record within about two years; long bonds bought in 2021 had still not recovered their price by 2026. The episode is the clearest modern example of why bonds are not a hedge against every kind of stock-market decline.