Rate Hike Cycle 2022

In response to the highest US inflation prints in four decades, the Federal Reserve raised the policy rate from approximately 0% in March 2022 to roughly 4.25-4.5% by year-end — the fastest tightening cycle since the early 1980s. The S&P 500 fell approximately 25% from its January 2022 high to its October 2022 low, the Nasdaq fell over 35%, and the Bloomberg US Aggregate Bond Index recorded its worst calendar year in its history (down approximately 13%). Long-duration assets — long Treasuries, growth equities, crypto, unprofitable tech, late-stage venture — were hit hardest. The traditional 60/40 portfolio recorded one of its worst years on record because stocks and bonds fell together.

• Short-duration Treasuries and T-bills — high coupons returned and roll yield turned positive for the first time in years.
• Commodities, particularly energy: the broad commodity index posted strong positive returns in 2022.
• Energy equities — the best-performing S&P sector by a wide margin, supported by tight supply and the war in Ukraine.
• The US dollar — DXY made a 20-year high mid-year.
• Value over growth: cheap, profitable, cash-generative businesses materially outperformed expensive growth.
• Floating-rate instruments and bank loans, whose coupons reset higher with the policy rate.

• Long-duration Treasuries — the long bond suffered an equity-like drawdown without the equity-like upside.
• Unprofitable technology, late-stage venture and SPAC equities — many fell 70-90% from peak.
• Crypto assets, which traded as a long-duration risk asset.
• The 60/40 portfolio — diversification between equities and duration broke down because both were repricing to the same higher discount rate.
• Real estate and REITs faced both higher discount rates and a tightening credit channel.

• Bonds are not always a hedge for equities. They hedge equity drawdowns caused by growth scares; they do not hedge equity drawdowns caused by discount-rate spikes.
• The starting yield of a bond largely determines its forward return. Buying a 10-year Treasury at a 1% yield is an entirely different proposition from buying one at a 4.5% yield.
• Inflation is the most important macro variable for a multi-asset portfolio because it changes the sign of the stock-bond correlation.
• Cash, long dismissed as "yield-free risk," reverted to being a meaningful asset class as soon as short rates rose.