Unit 2 · Level 3 · Rates → assets
2022: the masterclass
In 2022 the Fed sprinted from roughly 0% to over 4% in under a year, and the ECB followed. The S&P 500 fell about 19%, the Nasdaq about 33%, US aggregate bonds roughly 13% (giving the classic 60/40 portfolio one of its worst years in a century) and Bitcoin lost about 65%. One cause, many victims: the discount rate.
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What you get asked
Stocks AND bonds both fell hard in 2022 because:
Both are claims on future cash, so both answer to the discount rate. When it jumped, stocks and bonds fell for the same mechanical reason.
A 60/40 portfolio in a 2022-style year: the 60% in stocks falls 20%, the 40% in bonds falls 15%. What is the portfolio's return, in %?
0.6 × (−20%) + 0.4 × (−15%) = −12% − 6% = −18%. The bond side was supposed to cushion the fall. In 2022 it joined it.
2022 broke the comfortable assumption that bonds ___ when stocks fall.
That negative correlation holds in growth scares, when rates get cut. In an inflation shock, rates RISE, and bonds fall alongside stocks.
Match each asset to its rough 2022 result
Notice the pattern: the further an asset's value sat in the future (tech, then crypto) the harder the rate shock hit it.
The core lesson of 2022:
When inflation forces rates up quickly, the stock-bond cushion fails. The regime, not the asset labels, decides whether diversification works. 🐜
The rest of this unit
Interest rates are financial gravity. Trace how one number reaches every asset you own.