Markets have been freefalling quicker than Kanye West’s reputation this year, as spiralling inflation, rising interest rates and the war in Ukraine has rocked investors.
The S&P 500 is on track for its worst year since the infamous 2008 meltdown. As I write this, it has pared back 17.8%, so unless a miracle happens, it will close 2022 substantially in the red for the first time in (it was done the comparatively small amount of 4.8% in 2018).
This is not good. And while hindsight analysts will declare 2022 the most obvious end to the bull run ever, they likely said this for the last three or four years, too. Remember when the market was doomed to tank and never recover when something called COVID-19 popped up in March 2020?
Two years of pandemic money printing later and here we are, with the S&P 500 rocketing up to an all-time high of $4796 coming on the first day of trading of 2022, somewhat poetically.
Since then, it’s been nothing but down, down, down.
Unless, that is you are a non-US citizen. In which case, the diversification benefit of investing in foreign currency has come in rather nicely, as the US dollar has crushed all before it this year.
Despite pulling back in the last month or so, the greenback has been on a tear all year.
Why so? I wrote a deep dive on the reasons over the summer, but in short, there are two main reasons. The first is the US hiking interest rates quicker than the rest of the world, meaning capital has flowed in to the States to take advantage of this increased yield.
The second is that this always happens in times of uncertainty. The dollar has historically strengthened through nasty periods, as investors sell off risk assets and flock to the strongest and safest assets. There nothing perceived as safe as cash, and within currencies, the US dollar is the global reserve currency and reigns supreme.
The below chart (from the previously mentioned deep dive) demonstrates this really well.
So, if we take the return of the S&P 500 in local currency terms, it shows how foreign investors have been spared some of the pain of the tanking market.
That is a little messy to track, so the summary of the above position so far this year is shown below. Thanks to a little help from Liz Truss (I wrote a deep dive of that chaos here), British investors in particular are seeing returns that really aren’t synonymous with a vicious bear market, coming in at an 8.9% loss. Bad, but not that bad.
Obviously, there are several reasons that a depreciating local currency hurts investors more. Not only are trips to Disneyland in Florida significantly more expensive, but the local economy suffers via a range of problems including more expensive imports, a decline in purchasing power and higher inflation.
Nonetheless, it is a nice reminder of the importance of contextualising portfolio returns and engaging in prudent diversification. Obviously, personal circumstances for each investor are different and hence their respective currency treatment varies. Some may be hurt significantly more by a strengthening dollar, some may be saved by it.
But it’s very notable that for the majority of foreign investors who got paid in a local currency before putting it into the S&P 500, 2022 has not been that bad. Certainly when considering the relentless bull run of years prior (the S&P 500 was up over 7X from its 2008 low to its peak earlier this year) – especially during COVID – then long-term investors are doing just fine.
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