The 2022 Stock and Bond Decline
Why 2022 was one of the worst years on record for a balanced portfolio: inflation at a 40-year high, rapid Federal Reserve rate increases, and the rare case of stocks and bonds falling together, with what it showed about diversification, bond duration, and paying high prices for long-dated growth.
The short version
US consumer prices rose 9.1% in the year to June 2022, the most since 1981. The Fed raised its target from near zero in March 2022 to 4.25% to 4.5% by December, including four increases of three-quarters of a point, and kept going to 5.25% to 5.5% in July 2023. Rising rates hit both halves of a balanced portfolio: the S&P 500 returned −18.0% with dividends and 10-year Treasuries −17.8%, their worst year in data back to 1928. A 60/40 mix of the two lost about 18%, its third-worst year since 1928. The Nasdaq fell 33%, and mortgage rates more than doubled to 7%. Both markets recovered in 2023, and the S&P 500 regained its January 2022 high in January 2024.
By the end of this lesson, you'll be able to
- Explain how high inflation and fast rate increases hurt stocks and bonds at the same time
- Describe how rare it is for both to fall in the same year, and why bonds didn't cushion stocks this time
- Explain what 2022 showed about bond duration, valuations of long-dated growth, and diversification
Why this matters
In most stock market declines of the past few decades, high-quality bonds held up or rose, as in 2000 to 2002 and 2008. In 2022 they fell too. Ten-year Treasuries had their worst year in data going back to 1928, in the same year the S&P 500 lost 18%.1 For anyone holding a "balanced" portfolio, 2022 was the year the usual cushion didn't work, and the reason was inflation.
Inflation returns
Consumer prices rose 1.4% in the year to January 2021, 7.0% in the year to December 2021, and 9.1% in the year to June 2022, the fastest pace since 1981.2 Economists still weigh the causes. A 2023 study by Ben Bernanke and Olivier Blanchard found that most of the surge came from shocks to prices, such as sharp rises in commodity prices and price spikes where strong demand ran into limited supply, while tight labor markets had smaller but more lasting effects.3 What Drives Inflation covers that debate.
Rates rise fast
| Meeting | Increase | Upper limit |
|---|---|---|
| March 2022 | +0.25 | 0.50% |
| May 2022 | +0.50 | 1.00% |
| June 2022 | +0.75 | 1.75% |
| July 2022 | +0.75 | 2.50% |
| September 2022 | +0.75 | 3.25% |
| November 2022 | +0.75 | 4.00% |
| December 2022 | +0.50 | 4.50% |
| February to July 2023 | Four more of +0.25 | 5.50% |
Federal funds target range.4 The increases in 1994, described in The 1994 Bond Market Rout, added up to 3 percentage points over a year. In 2022 the Fed raised its target by 4.25 points in nine months.54
| Rate | End of 2021 | 2022 high |
|---|---|---|
| 2-year Treasury yield | 0.73% | 4.72% (November 7) |
| 10-year Treasury yield | 1.52% | 4.25% (October 24) |
| 30-year fixed mortgage rate | 3.11% | 7.08% (November 10) |
Daily Treasury yields and Freddie Mac's weekly mortgage survey.67
The rest of this lesson is for members
Still to come in this lesson: Both halves fell, The recovery, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Duration and ConvexityFixed Income in Depth (depth track)
- DiversificationPart 5: Building a Portfolio
- What Drives InflationEconomics for Investors (depth track)
- Real Yields and Breakeven InflationFixed Income in Depth (depth track)
Notes and sources
- Aswath Damodaran, NYU Stern School of Business. Historical Returns on Stocks, Bonds and Bills, with annual data through 2025 (updated January 2026). Checked 2026-11-02. Back to text
- Federal Reserve Bank of St. Louis (FRED), from the U.S. Bureau of Labor Statistics. Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, not seasonally adjusted (CPIAUCNS), monthly since 1913. Checked 2026-11-02. Back to text
- National Bureau of Economic Research. Ben S. Bernanke and Olivier J. Blanchard, What Caused the U.S. Pandemic-Era Inflation?, Working Paper 31417 (June 2023). Checked 2026-10-14. Back to text
- Federal Reserve Bank of St. Louis (FRED), from the Board of Governors of the Federal Reserve System. Federal Funds Target Range - Upper Limit (DFEDTARU), daily. Checked 2026-11-02. Back to text
- Board of Governors of the Federal Reserve System. Open Market Operations archive: changes in the intended federal funds rate, 1990 to 2008. Checked 2026-10-17. Back to text
- Federal Reserve Bank of St. Louis (FRED), from the Board of Governors of the Federal Reserve System. Treasury Constant Maturity yields, daily (series DGS3MO, DGS1, DGS2, DGS5, DGS10, DGS30), through October 8, 2026. Checked 2026-11-02. Back to text
- Federal Reserve Bank of St. Louis (FRED), from Freddie Mac. 30-Year Fixed Rate Mortgage Average in the United States (MORTGAGE30US), weekly. Checked 2026-11-02. Back to text
- Federal Reserve Bank of St. Louis (FRED), from Nasdaq OMX Group. NASDAQ Composite Index (NASDAQCOM), daily close. Checked 2026-11-02.
- Federal Reserve Bank of St. Louis (FRED), from S&P Dow Jones Indices. S&P 500 (SP500), daily close, most recent ten years. Checked 2026-11-02.