For all the ink spilled over its horrors, the 2022 stock market will go into the books as an undistinguished one in the history of bad years.
For traders who lived through it, though, certain things have made it feel worse than top-line alone numbers justify, a potential impediment to a quick recovery.
While the 25% peak-to-trough drop in the S&P 500 ranks in the lower range of bear-market wipeouts, it took a particularly jagged route to get there.
At 2.3 days, the average duration of declines is the worst since 1977. Throw in three separate bounces of 10% or more and it was a market where hopefulness was squeezed as in few years before it.
This may explain why despite a smaller drawdown, pessimism by some measures rivals that seen in the financial crisis and the dot-com crash.
Safety crumbled in government bonds, which failed to provide a buffer for beat-up equities. Buying put options as a way to hedge losses didn’t work either, adding to trader angst.
“There’s less and less people willing to go out there and stick their necks out to try and buy on those pullbacks,” said Shawn Cruz, head trading strategist at TD Ameritrade.
“When they start seeing the pullbacks and the drawdowns be longer and be more pronounced and the rallies being maybe more muted, that’s just going to serve to further drive more risk-averse behaviour in the market.”
While stocks headed to the Christmas break with a modest weekly decline, anyone hoping for the rebound from October lows to continue in December bounce has been burned.
The S&P 500 slipped 0.2% in the five days, bringing its loss for the month to almost 6%.
That would be just the fourth-worst month of the year in a market that at times has seemed almost consciously bent on wringing optimism out of investors.
Downtrends have been drawn out and big up days unreliable buy indicators. Consider a strategy that buys stocks one day after the S&P 500 posts a single-session decline of 1%.
That trade has delivered a loss of 0.3% in 2022, the worst performance in more than three decades.
Big rallies have also been traps. Purchasing stocks after 1% up days has led to losses, with the S&P 500 falling an average 0.2%.
“There’s an old saying on Wall Street to ‘buy the dip, and sell the rip,’ but for 2022, the saying should be ‘sell the dip, and sell the rip,’” Justin Walters, co-founder at Bespoke Investment Group, wrote in a note Monday.
It’s a stark reversal from the prior two years, when dip buying generated the best returns in decades. For people still conditioned to the success of the strategy – and until recently, many were – 2022 has been a wake-up call.
Retail investors, who repeatedly dived in earlier in the year when stocks pulled back, got burned, with all their profits made in the meme-stock rally wiped out. Now, they’re exiting in droves.
Day traders have net sold $20 billion of single stocks in December, pushing their total disposals in recent months to almost $100 billion – an amount that has unwound 15% of what they accumulated in the prior three years, according to an estimate by Morgan Stanley’s sales and trading team that’s based on public exchange data.
The retail army is likely not done selling even with January historically marking a strong month for that crowd, according to the Morgan Stanley team including Christopher Metli.
Using the 2018 episode as a guide, they see the potential for small-fry investors to dump another $75 billion to $100 billion of stocks as next year cranks up.
“Retail demand may not follow seasonal patterns as strongly in 2023 given a deteriorating macro backdrop, with low savings rates and a higher cost of living,” Metli and his colleagues wrote in a note last Friday.
The mood among pros is as bleak if not gloomier. In Bank of America Corp.’s survey of money managers, cash holdings rose to 6.1% during the fall, the highest level since the immediate aftermath of the 2001 terrorist attack, while allocation to stocks fell to an all-time low.
In other words, even though this retrenchment is nowhere near as bad as the 2008 crash that eventually erased more than half of the S&P 500’s value, it’s stoked similar paranoia, particularly when nothing but cash was safe during this year’s drubbing.
In part because of the market’s slow grind, once-popular crash hedges have misfired.
The Cboe S&P 500 5% Put Protection Index (PPUT), which tracks a strategy that holds a long position on the equity gauge while buying monthly 5% out-of-the-money puts as a hedge, is nursing a loss that is almost identical to the market’s, down roughly 20%.
Government bonds, which delivered positive returns during every bear market since the 1970s, failed to provide buffer.
With a Bloomberg index tracking Treasuries down 12% in 2022, it’s the first year in at least five decades where both bonds and stocks suffered synchronized losses of at least 10%.
“There was nowhere to hide for a whole year – that’s a big issue,” Mohamed El-Erian, chief economic adviser at Allianz SE and Bloomberg Opinion columnist, said on Bloomberg TV.
“It’s not just returns, it’s returns, correlation, and volatility that have hit you in a big way. Is it done? No, it’s not.”